Keynesian or Classical AS curve ?

Hey guys revising AS macro and im wondering on whether it matters if we use the keynesian or the classical Aggregate supply curve for the long term. And im also confused on why theyve given us two different approaches??

Reply 1

nverjvlev

Basically econimists cannot decide which curve is best to use - the classical implies that economies will always operate at full capacity (yf) wheras the keynesian says that although you can reach yf you dont necessarily operate there or want to (there are huge trade offs such as hyperinflation).

I'd suggest using the keynesian and using the classical as an evaluation point - 'however, if the LRAS curve is classical...'

Reply 2

Coolsul98

Original post by JohnGreek

We were suggested to use it the other way round, as the shape of the Keynesian offers more room for evaluation than the normal one. This is because, on top of the normal principles that apply to both curves (the greater the supply of labour or something, the greater the bargaining price and therefore the higher the wage rate and Price Level), the Keynesian one has some extra features that the "classical" one doesn't have.

For instance, you could mention that wages are sticky downwards due to contracts, trade unions, etc with regard to a Keynesian graph. You could also mention how the level of output affects the price to hire each additional factor of production, due to the owners of the factors having a progressively higher bargaining ability.

Thanks bro, but one more question, how does the classical Aggregate supply curve show full employment>?

Reply 3

mapotts53

The classical AS curve is called the natural rate of unemployment and is drawn up from the level of GDP (GDP axis) at which all available resources are fully employed. In this sense it is exactly the same as the PPF curve that you learned in AS micro. So it represents the level of GDP that can be produced given full use of our existing resources.
I agree that the Keynesian AS curve is often useful for evaluation because you can use it to identify the different effects of shifts in AD. The effect of a shift in AD depends on where the current equilibrium is on the AS curve.
Dr Mark Potts