3 Ranges of AS
Reasons why price tend to be inflexible or "sticky" in a downward direction:
1. Fear of Wars
2. Wage
Contracts
3.
Minimum Wage
4. Menu
Cost
5. Moral,
effort and productivity
Range 1 (Horizontal range/
Keynesian model)
- Output is low
relative to the economies full employment output
- Unemployment
increases & GDP decreases.
Range 2 (Intermediate
model)
Output
expands as savings increases.
Range 3 (Vertical or
Classical range)
- In the Long- Run
the A.S. curve is vertical, because the only effects of an increase in AD,
when we are at full employment or an increase at the price level.
- Firms can't respond to increase in demand by increasing output
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