- Keynesian aggregate supply curve
- The Keynesian aggregate supply curve is flat far below potential GDP, because wages and prices are sticky, and turns vertical at potential GDP.
- Classical long-run aggregate supply
- Classical long-run aggregate supply is a vertical line at potential GDP, so it determines real output wherever aggregate demand is drawn.
Zones of the aggregate supply curve
Can you name the three zones of the aggregate supply curve?
Where AD crosses AS decides whether extra spending buys output or only higher prices.
The Keynesian zone is the flat part of the curve far below potential GDP, where shifts in AD change output but barely move the price level.
Can you think of an example?
In a deep recession with many factories half-empty, a rise in government spending raises output and jobs with almost no rise in prices.
The intermediate zone is the curved middle section, where a rise in AD raises both output and the price level.
Can you think of an example?
With some spare capacity left, a rise in consumer spending lifts real GDP and cuts unemployment, but prices start to rise as well.
The neoclassical zone is the near-vertical part close to potential GDP, where shifts in AD mostly change the price level.
Can you think of an example?
At full employment, firms cannot find extra workers, so a rise in spending mainly bids up wages and prices, and output barely changes.