Question

In your view, is the U.S economy currently operating in the Keynesian, intermediate or neoclassical portion of the economy’s aggregate supply curve? Please explain your answer.

Answer 1

The aggregate supply curve takes various shapes or slopes depending on if it is operating in the Keynesian, intermediate or neoclassical model.

Under the Keynesian framework, the prices are supposed to be sticky or they do not change over the time while the GDP changes. So, the AS curve in the Keynesian range is horizontal to the x-axis. While in the neoclassical framework, the economy is presumed to be operating at the full employment level, so the output remains constant while the prices changes which give AS the vertical shape. In case of the intermediate range, the AS curve takes the upward sloping shape, wherein both prices and the GDP move in the same direction. As can be seen from the diagram, that the US AS curve is upward sloping, so it can be said that the economy is in the intermediate range. The Diagram has been plotted by taking the data from the OECD database.