CHAPTER 40
Keynesian View of Aggregate Supply and Demand
LEARNING OBJECTIVES
Explain and give examples of how a progressive view of aggregate supply and demand is
completely different from the traditional view.
OUTLINE OF CHAPTER
I.
II. Relations of Aggregate Supply and Demand
KEY TERMS
effective demand
demand when
someone has both desire and money
Keynesian cross
ANSWERS TO END OF CHAPTER REVIEW QUESTIONS
Explain and give examples of how a progressive view of aggregate supply and demand is
completely different from the traditional view.
1.
demand?
2. Can aggregate demand suffer from
3. How did Keynes explain that aggregate production and aggregate spending might not be
equal? What happens if aggregate production is greater than aggregate spending?
4. Why does aggregate spending rise more slowly than income?
Describe how Keynes built an entirely new view of aggregate supply and demand in which
an economy may not automatically recover from a recession.
5. How do Keynesians counter the neoclassical argument that, in a recession, falling prices
will restore demand for goods to the full employment equilibrium point?
Lower prices may also be accompanied by lower income. Lower prices will restore
6. How do Keynesians counter the neoclassical argument that in a recession, falling wages
and salaries will restore demand for labor to the full employment equilibrium point?
Demand for labor is a derived demand. Falling wages may encourage more demand for
7. How do Keynesians counter the neoclassical argument that in a recession, falling interest
rates will restore demand for loans for new investment to the full employment
equilibrium point?
8. How does Keynes explain inflation?
APPENDIX 40.1
Marx, Mitchell, and the Keynesian Revolution
LEARNING OBJECTIVE FOR APPENDIX 40.1
OUTLINE OF CHAPTER
I. Karl Marx
ANSWERS TO APPENDIX 40.1 REVIEW QUESTIONS
1.
Marx argued that Say was describing the operation of an economy under precapitalist
2.