CFA Level 1: Simple Keynesian Model and Aggregate Demand | Test Prep

Simple Keynesian Model and Aggregate Demand

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Question

Within the simple Keynesian model, when an economy operates below its long-run, full employment output constraint, an increase in aggregate demand will lead to an

Answers

A. increase in unemployment.

B. increase in prices.

C. increase in interest rates and money income, but employment and real income will remain constant.

D. increase in employment, output and real income. D

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Explanations

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A. B. C. D.

Explanation

Since according to the Keynesian model aggregate demand determines the level of output in the economy, an increase in the demand will cause output to increase. Since output is equivalent to income, real income also increases. The increase in output stimulates increases in labor demand and thus unemployment declines. Increases in aggregate demand below the full employment capacity of the economy has no effect on prices.

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