Classical Aggregate Supply Aggregate Demand (AS/AD) Model - Short Run and Long Run
EconplusDal・13 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.
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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
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Summary
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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.
