QUESTION 6 06. Which of the following statements about Keynesian policy are TRUE? a) Keynesian policy is most effective in the flat Keynesian (or Depression) range of the Short-Rum Aggregate Supply (AS) curve, where increases in Aggregate Demand are not likely to cause products price inflation. b) Keynesian policy is totally ineffective in the vertical Classical (past-full employment) range of the Short-Run Aggregate Supply (AS) curve, where an increase in Aggregate Demand will be completely dissipated by products price inflation. c) In the Intermediate range of the Short-Run Aggregate Supply (AS) curve, the effectiveness of Keynesian policy is partially dissipated by products price inflation. d) The Short-Run Aggregate Supply (AS) curve may will be vertical when the economy is trying to produce beyond full employment. But a vertical AS curve can also result from resource suppliers acting on inflationary expectations. This too will make Keynesian policy totally ineffective. e) Keynesian policy may be unavailable in a "Sovereign Debt Crisis" where people question the ability of government to make good on its debts, which causes drastic increases in interest rates on government debt. This makes government borrowing unsustainable and Keynesian expansionary policy unavailable. f) All the above.

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter20: Monetary Policy

Section20.A: Policy Disputes Using The Self Correcting Aggregate Demand And Supply Model

Problem 5SQ

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QUESTION 6

06. Which of the following statements about Keynesian policy are TRUE?

		a) Keynesian policy is most effective in the flat Keynesian (or Depression) range of the Short-Rum Aggregate Supply (AS) curve, where increases in Aggregate Demand are not likely to cause products price inflation.
		b) Keynesian policy is totally ineffective in the vertical Classical (past-full employment) range of the Short-Run Aggregate Supply (AS) curve, where an increase in Aggregate Demand will be completely dissipated by products price inflation.
		c) In the Intermediate range of the Short-Run Aggregate Supply (AS) curve, the effectiveness of Keynesian policy is partially dissipated by products price inflation.
		d) The Short-Run Aggregate Supply (AS) curve may will be vertical when the economy is trying to produce beyond full employment. But a vertical AS curve can also result from resource suppliers acting on inflationary expectations. This too will make Keynesian policy totally ineffective.
		e) Keynesian policy may be unavailable in a "Sovereign Debt Crisis" where people question the ability of government to make good on its debts, which causes drastic increases in interest rates on government debt. This makes government borrowing unsustainable and Keynesian expansionary policy unavailable.
		f) All the above.

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