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Sagot :
The keynesian contention that the short-run aggregate supply curve is horizontal is based on the assumption that there are "the horizontal region of the aggregate demand curve where there is a surplus of capacity and unemployment."
What is aggregate demand curve?
The relationship between overall price level and aggregate demand is depicted by the aggregate demand curve.
The cause of the downward sloping aggregate demand curve from left to right is-
- Real income effect: The real cash balance impact refers to the fact that as prices decline, real income increases and consumers can purchase more of their wants and needs.
- Balance of trade effect: A decline in Country X's relative price level could increase the cost of goods and services produced elsewhere, leading to an increase in exports and a decrease in imports. Imports are a withdrawal, whereas exports are an infusion.
- Interest rate effect: Whereas if central bank does have a specific inflation objective, low price inflation could result in a drop in interest rates. Less motivation to save is created by lower interest rates, which may also lead to the depreciation of the currency and an increase in exports.
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