Answer to Question #98285 in Macroeconomics for Shehryar

Question

Why in classical model aggregate output remains constant and aggregate supply also remains vertical ?
How we can increase output in classical model ?

Answer 1

The classical model aggregate output remains constant and aggregate supply also remain vertical because any change in price level leads to proportional change in money wage, leaving the wage unchanged. As a result, there is no change in equilibrium employment and, so, in aggregate output. The output in classical model can be increased by increasing labor supply. Therefore, the labor supply curve will shift to the right and equilibrium employment rises.