Question

1. As of January 1, 2020 (before the rapid spread of the Coronavirus) was the United States economy operating in the Keynesian, intermediate, or neoclassical portion of the economy’s Short Run Aggregate Supply Curve? Explain your answer carefully using data and information that you have gathered regarding real GDP, unemployment, the GDP deflator, and inflation. You should discuss the concepts of potential GDP and the natural rate of unemployment to receive full credit.

Answer 1

Answer :

The economy's short run aggregate supply curve can be isolated into three zones-Keynesian, Neo classical, and intermediate .The Keynesian zone is horizontal, the vertical is neoclassical zone and the upward sloping is intermediate zone which lies between the Keynesian and Neo classical zone.In the Keynesian zone the equilibrium level of real GDP is below then potential GDP. The economy is in recession and there is cyclical unemployment. The price level does not fluctuate a lot and so there is very little inflationary pressure.

The Neo classical zone is the vertical segment of the SRAS curve on the right. The equilibrium is close to potential GDP and the cyclical unemployment is low. Unemployment is structural. Shift of AD to one side or right have little effect on GDP or unemployment. Anyway this will bring changes in price level.

In the intermediate zone AD will shift to one side and yield will be close to potential GDP. Unemployment will be less yet pressure on price level will be more. If AD shifts to the left, output will be a far away from potential GDP, increase unemployment, and pressure on price will be less.

Keynesian economists accept that most of economies are in the Keynesian zone and Neo classical is theoritical. Neo classical economists accept most of the economies are Neo classical and Keynesian is theoritical. US is in the expansion stage of the business cycle. It is in the Neo classical zone.

Potential GDP is the greatest quantity that an economy can create with full employment of its resources that is labor ,capital etc.

Natural rate of unemployment is frictional and structural unemployment combined when labor and different resources are in equilibrium in an economy that is expanding.

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