How is the Modern Keynesian short-run aggregate supply curve best characterized in terms of real GDP and price level relationship?

How is the Modern Keynesian short-run aggregate supply curve best characterized in terms of real GDP and price level relationship?

• A. It is very steep at low levels of real GDP; decreases slightly as real GDP grows; and becomes horizontal at full employment.
• B. It is very flat at low levels of real GDP; increases slightly as real GDP grows; and becomes horizontal at full employment.
• C. It is very flat at low levels of real GDP; increases slightly as real GDP grows; and becomes very steep as real GDP surpasses full employment.
• D. It is very steep at low levels of real GDP; decreases slightly as real GDP grows; and becomes very flat as real GDP surpasses full employment.

Answer: (C)

The Modern Keynesian short-run aggregate supply curve is characterized by its responsiveness to changes in real GDP and the behavior of price levels as these changes occur. At low levels of real GDP, the economy can respond effectively to increased demand without significant price increases, leading to a relatively flat portion of the curve. This flatness indicates that firms can produce more output with minimal increases in price levels, as there are underutilized resources. As real GDP grows and approaches the full employment level, the short-run aggregate supply curve becomes steeper. This steepening reflects higher production costs and tighter resource constraints, where additional output can only be achieved by significantly increasing prices. Once the economy surpasses the full employment level, production becomes unsustainable, and any attempt to push real GDP higher leads to substantial inflationary pressure. Thus, the description of the curve being very flat at low levels of real GDP, increasing slightly as output grows, and then becoming very steep as it surpasses full employment accurately captures the relationship between real GDP and price levels in the short run in a Modern Keynesian framework. This illustrates how the economy functions when transitioning from underutilization of resources to potential overheating and inflation.

The Modern Keynesian short-run aggregate supply curve is characterized by its responsiveness to changes in real GDP and the behavior of price levels as these changes occur. At low levels of real GDP, the economy can respond effectively to increased demand without significant price increases, leading to a relatively flat portion of the curve. This flatness indicates that firms can produce more output with minimal increases in price levels, as there are underutilized resources.

As real GDP grows and approaches the full employment level, the short-run aggregate supply curve becomes steeper. This steepening reflects higher production costs and tighter resource constraints, where additional output can only be achieved by significantly increasing prices. Once the economy surpasses the full employment level, production becomes unsustainable, and any attempt to push real GDP higher leads to substantial inflationary pressure.

Thus, the description of the curve being very flat at low levels of real GDP, increasing slightly as output grows, and then becoming very steep as it surpasses full employment accurately captures the relationship between real GDP and price levels in the short run in a Modern Keynesian framework. This illustrates how the economy functions when transitioning from underutilization of resources to potential overheating and inflation.