AD Shift Right — Keynesian (Below Full Employment)

What this diagram shows

This diagram shows what happens when aggregate demand increases in the Keynesian model when the economy is operating below full employment. The horizontal section of the Keynesian AS curve means that when AD shifts right, real GDP increases significantly while the price level remains constant. This demonstrates Keynes' key argument that during recessions, governments can stimulate demand to reduce unemployment without causing inflation. It's crucial for understanding why Keynesian economists support demand-side policies during economic downturns.

Key points

• The AS curve is horizontal below full employment, showing spare capacity in the economy
• Rightward AD shift increases real GDP from Y1 to Y2 with no change in price level
• This demonstrates that unemployment can be reduced without causing inflation
• The increase in output occurs because idle resources (unemployed workers, unused factories) are brought back into production
• This justifies Keynesian demand-side policies like increased government spending or lower interest rates during recessions

Exam board notes

All major exam boards treat this diagram identically, emphasizing the horizontal nature of the Keynesian AS curve below full employment. Some boards like AQA may place slightly more emphasis on linking this to historical context of the 1930s Depression and Keynes' policy recommendations.