Step 1: Model Comprehension.
- Classical Model: Aggregate Supply (AS) is vertical, with output dictated by supply-side elements (labor, capital). - Keynesian Model: AS slopes upward, implying output rises with increasing prices. - Classical Aggregate Demand (AD) is driven by money supply. Keynesian AD is influenced by broader factors like investment and consumption, not solely capital stock.
Step 2: Option Evaluation.
- (A) Classical AS is vertical: Verified. The classical AS curve is indeed vertical.
- (B) Keynesian AS slopes upward: Verified. The Keynesian AS curve exhibits an upward slope.
- (C) Classical AD is solely money supply dependent: Verified. In the classical framework, AD is contingent on the money supply.
- (D) Keynesian AD is solely capital stock dependent: Rejected. Keynesian AD is subject to a wider array of determinants beyond capital stock.
Step 3: Determination.
Statement (D) is identified as inaccurate, as Keynesian AD is influenced by multiple factors beyond the capital stock.
In the context of the Keynesian concept of a multiplier, a \(\$\)1 increase in government spending financed by a \(\$\)1 increase in taxes will cause equilibrium income to:
Which of the following statements are correct about the IS curve?
(A) It shows the combination of the interest rate and the level of income such that the money market is in equilibrium.
(B) It is negatively sloped.
(C) The smaller the multiplier and the more sensitive investment spending is to changes in the interest rate, the steeper the IS curve.
(D) An increase in government purchases shifts the IS curve to the right.
Choose the correct answer from the options given below: