Question

Which of the following is not true about the Classical and Keynesian aggregate demand (AD) and aggregate supply (AS) schedules?

• A. Classical AS schedule is vertical.
• B. Keynesian AS schedule slopes upward to the right.
• C. Classical AD schedule depends only on the level of money supply.
• D. Keynesian AD schedule depends only on the existing capital stock.

Hint:

In Keynesian theory, aggregate demand is influenced by a range of factors, including government spending and investment, not just capital stock.

Answer 1

The Correct Option is D

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.