Classical and Keynesian Models of Aggregate Supply: A Comparison
1. Classical and Keynesian aggregate supply models
The Classical model of aggregate supply is based on the proposition that prices are determined by domestic production and demand conditions. The Keynesian model, on the other hand, is based on the substitution of imports for domestic production in response to changes in relative prices.
2. Price determination in the Classical model
In the Classical model, domestic production and demand determine prices. Prices are set at the point where aggregate demand equals aggregate supply. The level of output is determined by the intersection of the aggregate supply and aggregate demand curves.
3. Price determination in the Keynesian model
In the Keynesian model, prices are determined by the substitution of imports for domestic production in response to changes in relative prices. The level of output is determined by the intersection of the marginal cost curve and the aggregate demand curve.
4. The policy implications of the Classical and Keynesian models
The Classical model implies that fiscal policy is ineffective in influencing aggregate demand and output. The Keynesian model, on the other hand, implies that fiscal policy can be used to influence aggregate demand and output.
5. Conclusion
The Classical and Keynesian models of aggregate supply differ in their justifications and policy implications. The Classical model implies that fiscal policy is ineffective in influencing aggregate demand and output while the Keynesian model suggests that fiscal policy can be used to affect these variables.