CFA® Level 1: Keynesian Model | Aggregate Demand Increase | Test Prep

CFA® Level 1: Keynesian Model

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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 increase in

Answers

A. real income.

B. unemployment.

C. prices.

D. employment, output and prices, but real income will remain constant.

E. interest rates and money income, but employment and real income will remain constant.

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Explanations

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A. B. C. D. E.

Keynes considered aggregate supply to be accommodative of aggregate demand. Thus, an increase in aggregate demand will stimulate aggregate output. The equivalence between output and income also suggests that real income will rise. Below the full employment capacity of the economy, increases in aggregate supply have little effect on the price level. This is the result of the Keynesian assumption that at less than full employment output levels, prices and wages are fixed since they are inflexible in a downward direction.

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