Question

Describe and explain the shape of the short run aggregate supply curve along the Keynesian, intermediate and neoclassical zones. Identify the zone(s) where unemployment should be the focus and where inflation should be the focus.

Answer 1

Short Run aggregate supply curve along the Keynesian zone is relatively flat .In this zone, the equilibrium level of real GDP is below the potential level. The economy is in recession and cyclical unemployment level is high. If aggregate demand shifts to the right or left in this zone , then there is no pressure on price level , it will only determine the level of output and unemployment.

Short run aggregate supply curve along the Neo classical zone is almost vertical . In this zone . the real GDP is amost equal to the potential level , therefore, cyclical unemployment level is too low. In this zone, if the aggregate demand curve shifts to the right or eft then this have very little impact on the level of real GDP and hence unemployment , it only creates pressures on the change in the price level.

Short run aggregate supply curve along the Intermediate zone is curved and upward sloping . In this zone, we might expect unemployment and inflation to move in opposite directions.

Hence, we can say from the above explanation that along the keynesian zone unemployment should be focus and along the Neo classical zone inflation should be the focus.

All these zones are shown in the figure below: