Discuss why the aggregate supply (AS) curve is relatively flat within the low ranges of aggregate...

Discuss why the aggregate supply (AS) curve is relatively flat within the low ranges of aggregate output and relatively vertical within the ranges of high aggregate output. Which part of the AS curve fiscal policy works better and why?

Expert Solution

Aggregate supply curve is relatively flat on the lower ranges of aggregate output . The reason is that it is the Keynesian area. Keynes believe in short run. In the short run one of the factor is fixed and factor payment is sticky. The quantity of aggregate supply is sensitive to change in price level . Therefore flat in low ranges of aggregate output.

2) aggregate supply (AS) curve is relatively vertical within the ranges of high aggregate output. In the long time period all the factor of production are variable. Only capital, labor and technology affect the aggregate supply. The changes in aggregate demand have only temporary impact on total output.

The lower part of the AS curve is that part on which fiscal policy works better. The reason is that it is Keynesian part and Keynes had believe in the role of government to increase the aggregate demand and income , output and employment.

Rahul Sunny answered 8 months ago

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