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: Understanding the Classical and Keynesian models.
- In the classical model, the AS curve is vertical, meaning output is determined by supply factors like labor and capital. - In the Keynesian model, the AS curve is upward sloping, indicating that output increases as prices rise. - Classical AD depends primarily on money supply, while Keynesian AD depends on various factors including investment and consumption, not just capital stock.

Step 2: Analysis of options.
- (A) Classical AS schedule is vertical: This is correct. The AS curve is vertical in the classical model.
- (B) Keynesian AS schedule slopes upward to the right: This is correct. The Keynesian AS curve is upward sloping.
- (C) Classical AD schedule depends only on the level of money supply: This is correct. In the classical model, AD depends on the money supply.
- (D) Keynesian AD schedule depends only on the existing capital stock: This is incorrect. The Keynesian AD schedule is influenced by more factors than just capital stock.

Step 3: Conclusion.
The incorrect statement is (D), as Keynesian AD depends on more than just the capital stock.