Question

b) What do you see as the essential difference between classical and Keynesian theories of aggregate supply?

Answer 1

Classics theory believes that full employment is the employment level where the economy will return to and tends to remain at in the long run. Using a graph pure classical theories would have a vertical A'S curve that shows the same GDP associated with full employment at each price-level in the economy. On the other Han Keynesian theory holds that unemployment is the normal state of the economy and significant government intervention is required if employment/output targets are to be reached. Graphically the A'S curve is horizontal as per the Keynesian theory.