Chapter 35, Problem 4MCQ

To determine

The correct option which specifies the difference between classical model of price and Keynesian economics

Answer to Problem 4MCQ

From the available options, the correct option is the classical model assumes a vertical short-run aggregate supply curve.

Explanation of Solution

The classical model of the price level specifies that since the aggregate supply curve is vertical in short-run, changes in the money supply only impact the overall level of prices. It means classical assumes that there is a vertical short-run aggregate supply curve and this model cannot assume an upward slope but the aggregate demand can change in the long run. According to Keynesian economics, variations in aggregate demand impact the aggregate output as the prices can rigid and changes in any aspect of spending, whether government, investment, or consumer spending, would affect the output level which means the short-run aggregate supply curve in Keynesian economics would not be vertical.

Therefore, the correct option is a (the classical model assumes a vertical short-run aggregate supply curve) and all other options are incorrect as the supply curve in classical model can be vertical but in Keynesian model it would not be vertical which is the main difference between these models.

Economics Concept Introduction

Introduction: The classical model of price indicates that economy is flowing freely and prices can be adjusted according to the ups and downs in the economy such as in good economic condition, prices will go up.

According to Keynesian economics, the rigidity in levels of price can fluctuate other components such as spending, investment, consumption by affecting the output level.