Classical Aggregate Supply Aggregate Demand (AS/AD) Model - Short Run and Long Run

EconplusDal2 minutes read

Classical and Keynesian economics differ in their views on aggregate demand and supply, with the classical model emphasizing self-correction and the Keynesian model advocating for government intervention. The two models also disagree on the distinction between short-run and long-run equilibrium, impacting how they address scenarios like recession, inflation, and overheating in the economy.

Insights

  • Classical and Keynesian economics present contrasting views on aggregate demand and supply, with the former emphasizing self-correction mechanisms in the long run and the latter rejecting the distinction between short and long-term effects.
  • In the classical model, economic equilibrium is achieved through self-correction mechanisms in the long run without government intervention, while scenarios like recession or overheating are addressed through adjustments in wages to shift the short-run aggregate supply curve.

Get key ideas from YouTube videos. It’s free

Recent questions

  • What are the two major schools of thought on aggregate demand and supply?

    Classical and Keynesian

  • How does the short-run aggregate supply curve differ from the long-run aggregate supply curve?

    SRAS upward sloping, LRAS vertical at full employment

  • What happens in the economy when short-run aggregate demand equals short-run aggregate supply?

    Short-run equilibrium

  • How does the Keynesian model differ from the Classical model in terms of government intervention?

    Keynesian model supports government intervention

  • How does the economy address an inflationary gap according to the Classical model?

    Variable wages shift SRAS left

Related videos

Summary

00:00

Classical vs Keynesian Models of Aggregate Demand

  • Two major schools of thought on aggregate demand and supply: Classical and Keynesian.
  • Classical model assumptions: Short-run and long-run aggregate supply differ, short-run determined by production costs, long-run by factors of production quantity and quality.
  • Short-run aggregate supply curve (SRAS) upward sloping, long-run aggregate supply curve (LRAS) vertical at full employment level.
  • Two equilibriums: short-run (AD = SRAS) and long-run (AD = LRAS).
  • Keynesian model disagrees with classical assumptions, no distinction between short and long run.
  • In classical model, economy self-heals in long run to full employment without government intervention.
  • Recession scenario: firms reduce costs by cutting wages to shift SRAS right, back to full employment.
  • Inflationary gap: wages fixed in short run due to high minimum wages, unemployment benefits, and strong trade unions.
  • Overheating scenario: firms produce beyond full employment in short run, leading to inflationary gap, resolved by variable wages shifting SRAS left.
Channel avatarChannel avatarChannel avatarChannel avatarChannel avatar

Try it yourself — It’s free.