Shifts analysis and output gaps

Draw AD increasing on a Keynesian

Analyse the outcomes of the diagram

Economics growth increases as firms have an incentive to meet demand with a higher quantity produced

Unemployment decreases - as labour is a derived demand so when more goods and services are demanded they need more workers to create the goods

Inflation increases - demand pull inflation due to more pressure on existing factors of production increasing the prices of these factors

Trade position worsens as demand for imports increases as well and our exports become less price competitive / imports more price competitive

Draw LRAS increasing on a keynesian

Analyse the outcomes of this diagram

Economic growth due to firms increasing output as there is more demand

Unemployment decreases due to derived demand (More goods being produced)

Inflation falls as there is reduced competition for goods and services

Trade position improves as exports become more price competitive

What is the biggest depends on point for keynesian

AD eval

Initial level of economic activity - if recession there will not be any inflation however if it is a boom there will be high levels of inflation

Size of multiplier

Extent of the change in AD

What is a negative output gap

Where firms produce output below full capacity / potential output

What is a positive output gap

Where the actual level of output is above full capacity/ potential output

Inflationary

How can output gaps be used for evaluation

AD increases traditionally will say price increases but according to Keynesian economic theory if there is spare capacity inflation will not rise

On the other hand if there is no spare capacity inflation will rise economic growth will not change

If LRAS grow unaccompanied by AD with a pre-existing negative output gap then the economy may just not change