Question

1. Describe Keynesian approach and Classical model in aggregate supply long-term with graph

2. Compare the development of the inflation rate in the Czech Republic to  the world in 2018

Answer 1

1. Keynesian approach of long term aggregate supply curve.
The aggregate supply curve in Keynesian approach is an elastic curve. This is owing to the fact that an economy can be below the full capacity level of output for a longer period due to different reasons. Some of the reasons being- imperfect markets, sticky wages, etc. As a result the long term aggregate supply curve is somewhat horizontal at the lower price level and as the price increase the curve becomes vertical indicating natural level of employment in the economy.

Classical model of long term aggregate supply curve.
In classical model, the long term aggregate supply curve is a vertical line parallel to the y-axis. This is owing to the fact that classical economics believe that in a free market, the market forces automatically adjusts to an efficient level of outcome. The aggregate supply curve is inelastic in nature and hence any shift that takes place will be temporary or for a short period, which is why the aggregate supply curve is a vertical line.