Yes — Keynesianism in its traditional form does tend to struggle with supply-side shocks, and the reasons have to do with both its intellectual roots and its policy tools.
1. Why Keynesianism is less suited to supply shocks
a. Original focus on demand shortfalls
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Keynes’ General Theory (1936) emerged from the Great Depression, a period of excess capacity and insufficient aggregate demand, not from a world of tight resources.
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The policy prescriptions — fiscal stimulus, monetary easing — are designed to boost demand when idle labor and capital exist.
b. The nature of supply-side shocks
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A supply shock (e.g. an oil embargo, crop failure, sudden drop in productive capacity) reduces the economy’s potential output.
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This leads to stagflation — rising prices and falling output.
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Stimulating demand in such a context risks worsening inflation without restoring lost production.
2. The inflation problem
Under a supply shock:
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Aggregate supply curve shifts left → higher prices at every level of output.
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Traditional Keynesian stimulus moves the aggregate demand curve right, which:
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Raises prices even more.
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Does not fix the underlying shortage of goods or productive inputs.
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This is why 1970s oil shocks confounded policymakers who were using Keynesian models — inflation persisted despite high unemployment, something the old Phillips Curve trade-off didn’t predict well.
3. Later adaptations
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New Keynesian models now integrate expectations, supply-side rigidities, and shocks into their framework.
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Policymakers learned that in a supply shock, the Keynesian playbook must be modified:
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Sometimes tightening demand is needed to contain inflation.
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Supply-side measures (investment incentives, deregulation, resource reallocation) may be more appropriate.
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In short:
Classical Keynesianism is optimized for demand-driven recessions. It struggles with supply shocks because its main lever — boosting demand — does not restore lost productive capacity and can accelerate inflation. This mismatch became historically visible in the stagflation era.
If you want, I can map out exactly how the AD–AS curves behave differently under a demand shock vs a supply shock in a Keynesian framework, so you can see the structural problem.
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