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The Keynesian zone sits at the far left of the SRAS curve, where it is relatively flat and output is far below potential GDP. In this zone, what does a shift in AD mainly affect?
AMainly the price level, barely touching output
BNeither output nor the price level at all
COnly the natural rate of unemployment
DMainly the output level, barely touching prices
Answer & Solution
Correct answer: D. Mainly the output level, barely touching prices
1. In the Keynesian zone, the SRAS curve is nearly flat, since so much idle capacity is available.
2. A shift in AD along a flat SRAS mostly moves the intersection horizontally, changing output a great deal.
3. Because the SRAS curve barely rises here, the price level barely moves in response to the same AD shift.
4. This is the reverse of what happens in the neoclassical zone, where AD shifts mainly move the price level instead.
_Source: OpenStax Principles of Macroeconomics for AP Courses (CC BY 4.0), Ch 10 "The Aggregate Demand/Aggregate Supply Model", section 10.6 | Keynes’ Law and Say’s Law in the AD/AS Model_
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