In your view is the United States economy currently operating in the Keynesian, intermediate, or neoclassical...

In your view is the United States economy currently operating in the Keynesian, intermediate, or neoclassical portion of the economy’s aggregate supply curve.

Why it might be important for policymakers to know which zone of the Short Run Aggregate Supply Curve (SRAS) is currently operating in?

Solutions

Expert Solution

Due to the fact that inflation has started increasing in recent quarters, it appears that th short run supply curve is upward sloping hence, the United States economy is currently operating in the intermediate portion of the economy’s aggregate supply curve.

It is very important for the policymakers to judge and investigate in which zone of the Short Run Aggregate Supply Curve (SRAS) is currently operating in. In the Keynesian range, there is no crowding out and complete effect of spending multiplier can be implemented. Recessions can be more effectively tackled by fiscal policy under this range. (Horizontal AS)

In neoclassical range, there can be no increase in GDP so that the economy is operating at full employment level of output. Hence fiscal policy or even monetary policy becomes ineffective. (Vertical AS)

Hence the choice of an appropriate policy depends on which zone we are working with

Rahul Sunny answered 1 year ago

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