Question

Identify and briefly explain the different zones of the short run aggregate supply curve.

Draw an AD/AS supply graph that depicts an inflationary gap. Be sure to label the axes and curves. Suggest one policy that could bring the economy to potential output and identify which curve (AD or AS) that would shift as a result of the policy.

Answer 1

ans 1=

• The SRAS curve can be segregated into 3 zones. These are-the horizontal Keynesian region, the upward - sloping middle region & the erect neoclassical region .
• Keynes’ Rule says that demand makes its own supply; alterations in AD cause alterations in actual GDP & in employment levels.
• The Keynesian region appears at lower output levels on the short-term AS curve where it is rather horizontal, thus movements in AD will impact output but have a low impact on the price level.
• Say’s Rule says that supply makes its own demand; alterations in AD have no impact on actual GDP/ employment levels, merely on the price level.
• Say’s Rule can be depicted on the vertical neoclassical region of the AS curve. The neoclassical region appears on the right of the AS curve where it is rather erect , so movements in AD will impact the price level however have low influence on output.
• The middle region in the midway of the aggregate supply curve is upward sloping, hence an increase in AD will cause greater output & price level, & vice versa