What is the Keynesian

Aggregate Supply
Curve?

AGGREGATE SUPPLY SIR BURUNGUDZI

 Keynesian Aggregate Supply Curve

The Keynesian aggregate supply curve

is non-linear where the elasticity of
aggregate supply is dependent in part
on the level of spare productive
capacity at different stages of a
nation’s economic cycle.

AGGREGATE SUPPLY SIR BURUNGUDZI

 KEYNESIAN AGGREGATE SUPPLY CURVE
General Price
Level (GPL)

Real GDP (Y)

 KEYNESIAN AGGREGATE SUPPLY CURVE
General Price
Level (GPL)

Perfectly elastic
portion of the AS curve

Real GDP (Y)

 KEYNESIAN AGGREGATE SUPPLY CURVE
General Price
Level (GPL)

Elasticity of aggregate supply

now starting to drop as
economy heads towards
productive capacity

Perfectly elastic
portion of the AS curve

Real GDP (Y)

 KEYNESIAN AGGREGATE SUPPLY CURVE
General Price
Elasticity of supply
Level (GPL) is zero when full
capacity is
reached
Elasticity of aggregate supply
now starting to drop as
economy heads towards
productive capacity

Perfectly elastic
portion of the AS curve

Real GDP (Y)

 KEYNESIAN AGGREGATE SUPPLY CURVE
General Price
Elasticity of supply
Level (GPL) is zero when full
capacity is
reached
Elasticity of aggregate supply
now starting to drop as
economy heads towards
productive capacity

Perfectly elastic
portion of the AS curve

YFC Real GDP (Y)

 KEYNESIAN AGGREGATE SUPPLY CURVE
General Price
Aggregate Supply
Level (GPL)

YFC Real GDP (Y)

 KEYNESIAN AGGREGATE SUPPLY CURVE
General Price
Aggregate Supply
Level (GPL)

AD1

Y1 YFC Real GDP (Y)

 KEYNESIAN AGGREGATE SUPPLY CURVE
General Price
Aggregate Supply
Level (GPL)

AD1 AD2

Y1 YFC Real GDP (Y)

 NON-INFLATIONARY ECONOMIC GROWTH
General Price
Aggregate Supply
Level (GPL)

AD1 AD2

Y1 Y2 YFC Real GDP (Y)

 NON-INFLATIONARY ECONOMIC GROWTH
General Price Non-inflationary growth
An outward shift in AD from AD1 to AD2 can Aggregate Supply
Level (GPL) be met without an increase in the general price
level because aggregate supply is highly elastic

AD1 AD2

Y1 Y2 YFC Real GDP (Y)

 INFLATIONARY PRESSURES FROM RISING AD
General Price
Aggregate Supply
Level (GPL)

AD3

AD1 AD2

Y1 Y2 Y3 YFC Real GDP (Y)

 INFLATIONARY PRESSURES FROM RISING AD
General Price
Aggregate Supply
Level (GPL)

AD4
AD3

AD1 AD2

Y1 Y2 Y3 Y4 Real GDP (Y)

YFC
 INFLATIONARY PRESSURES FROM RISING AD
General Price
Aggregate Supply
Level (GPL)

GPL1
AD4
AD3

AD1 AD2

Y1 Y2 Y3 Y4 Real GDP (Y)

YFC
 INFLATIONARY PRESSURES FROM RISING AD
General Price
Aggregate Supply
Level (GPL)

GPL2

GPL1
AD4
AD3

AD1 AD2

Y1 Y2 Y3 Y4 Real GDP (Y)

YFC
 INFLATIONARY PRESSURES FROM RISING AD
General Price
Inflationary Aggregate Supply
pressures Level (GPL)
Here, an
outward shift in
AD from AD3 to
AD4 causes a
sharp rise in the GPL2
general price
level because
AS is now GPL1
inelastic - AD4
output is close
to full-capacity AD3
levels
AD1 AD2

Y1 Y2 Y3 Y4 Real GDP (Y)

YFC
 What helps to explain
the Keynesian Aggregate
Supply Curve?

AGGREGATE SUPPLY SIR BURUNGUDZI

 EXPLAIN THE SHAPE OF THE KEYNESIAN AS CURVE

 When spare capacity is high, aggregate supply will be elastic: this means that a rise
in aggregate demand can be met easily by increased output and there is little threat
of rising prices (inflation)
 The elasticity of the curve falls as a country moves through an economic cycle:
1. The amount of spare capacity declines
2. There is the possibility of diminishing returns in production
3. Bottlenecks appear in the supply of key inputs including skilled labour
 When AS is perfectly inelastic, an economy is at full capacity (equivalent to being on
the PPF boundary); this means that further increases in AD are purely inflationary in
the short run with little extra real output

AGGREGATE SUPPLY SIR BURUNGUDZI

LONG RUN GROWTH – AN OUTWARD SHIFT OF AS
General Price AS1 AS2
Level (GPL)

Real GDP (Y) YFC YFC2

 Showing a negative
output gap using the
Keynesian AS curve

AGGREGATE SUPPLY SIR BURUNGUDZI

 SHOWING A NEGATIVE OUTPUT GAP
General Price
Aggregate Supply
Level (GPL) AD1

Y1 YFC Real GDP (Y)

 SHOWING A NEGATIVE OUTPUT GAP
General Price
Aggregate Supply
Level (GPL) AD1
AD2

Y2 Y1 YFC Real GDP (Y)

 SHOWING A NEGATIVE OUTPUT GAP
General Price
Aggregate Supply
Level (GPL) AD1
AD2

A
B

Y2 Y1 YFC Real GDP (Y)

 SHOWING A NEGATIVE OUTPUT GAP
General Price
Aggregate Supply
Level (GPL) AD1
AD2

A
B
Negative
output gap

Y2 Y1 YFC Real GDP (Y)

A-LEVEL ECONOMICS

Aggregate Supply

The Keynesian
Aggregate Supply Curve
A-LEVEL ECONOMICS

Aggregate Supply

Shifts in the Keynesian

Aggregate Supply Curve
 What might cause an
inward shift of the
Keynesian AS Curve?

AGGREGATE SUPPLY SIR BURUNGUDZI

 What might cause an inward
shift of the Keynesian AS Curve?
1. A rise in unit labour costs
2. Increases in the costs of
imported energy
3. Higher environmental taxes

AGGREGATE SUPPLY SIR BURUNGUDZI

 AN INWARD SHIFT OF AGGREGATE SUPPLY
General Price
Aggregate Supply
Level (GPL) AD1

Y1 YFC Real GDP (Y)

 AN INWARD SHIFT OF AGGREGATE SUPPLY
General Price
Aggregate Supply
Level (GPL) AD1

AS2

AS1

Y1 YFC Real GDP (Y)

 AN INWARD SHIFT OF AGGREGATE SUPPLY
General Price
Aggregate Supply
Level (GPL) AD1

AS2

AS1

Y1 YFC Real GDP (Y)

 AN INWARD SHIFT OF AGGREGATE SUPPLY
General Price
Aggregate Supply
Level (GPL) AD1

AS2

AS1

Y2 Y1 YFC Real GDP (Y)

 AN INWARD SHIFT OF AGGREGATE SUPPLY
General Price
Aggregate Supply
Level (GPL) AD1

AS2

GPL1
AS1

Y2 Y1 YFC Real GDP (Y)

 AN INWARD SHIFT OF AGGREGATE SUPPLY
General Price
Aggregate Supply
Level (GPL) AD1

AS2

GPL2
GPL1
AS1

Y2 Y1 YFC Real GDP (Y)

 What might cause an
outward shift of the
Keynesian AS Curve?

AGGREGATE SUPPLY SIR BURUNGUDZI

 What might cause an outward
shift of the Keynesian AS Curve?
1. A fall in world energy prices
2. Stronger exchange rate leading to
lower import prices
3. Government subsidies to producers

AGGREGATE SUPPLY SIR BURUNGUDZI

 OUTWARD SHIFT OF AGGREGATE SUPPLY
General Price
Aggregate Supply
Level (GPL)

AD1

Y1 YFC Real GDP (Y)

 OUTWARD SHIFT OF AGGREGATE SUPPLY
General Price
Aggregate Supply
Level (GPL)

AD1

Y1 YFC Real GDP (Y)

 OUTWARD SHIFT OF AGGREGATE SUPPLY
General Price
Aggregate Supply
Level (GPL)

AD1

Y1 YFC Real GDP (Y)

 OUTWARD SHIFT OF AGGREGATE SUPPLY
General Price
Aggregate Supply
Level (GPL)

AD1

Y1 Y2 YFC Real GDP (Y)

 OUTWARD SHIFT OF AGGREGATE SUPPLY
General Price
Aggregate Supply
Level (GPL)

GPL1

AD1

Y1 Y2 YFC Real GDP (Y)

 OUTWARD SHIFT OF AGGREGATE SUPPLY
General Price
Aggregate Supply
Level (GPL)

GPL1
GPL2

AD1

Y1 Y2 YFC Real GDP (Y)

 How do we show long
run economic growth
using a Keynesian
Aggregate Supply Curve?

AGGREGATE SUPPLY SIR BURUNGUDZI

LONG RUN GROWTH – AN OUTWARD SHIFT OF AS
General Price AS1 AS2
Level (GPL)

Real GDP (Y) YFC YFC2

LONG RUN GROWTH – AN OUTWARD SHIFT OF AS
General Price AS1 AS2
Level (GPL)

GPL1

AD1

Real GDP (Y) Y1 YFC YFC2

LONG RUN GROWTH – AN OUTWARD SHIFT OF AS
General Price AS1 AS2
Level (GPL)

GPL1

AD1 AD2

Real GDP (Y) Y1 YFC YFC2

LONG RUN GROWTH – AN OUTWARD SHIFT OF AS
General Price AS1 AS2
Level (GPL)

GPL1

AD1 AD2

Real GDP (Y) Y1 YFC YFC2

LONG RUN GROWTH – AN OUTWARD SHIFT OF AS
General Price AS1 AS2
Level (GPL)

GPL1

AD1 AD2

Real GDP (Y) Y1 YFC Y2 YFC2

A-LEVEL ECONOMICS

Aggregate Supply

Shifts in the Keynesian

Aggregate Supply Curve