Classical and Keynesian Views of Aggregate Supply

1. Neo-classical

  • Aggregate supply is vertical and equal to potential GDP. In the long run the economy is at full employment. Therefore, the aggregate supply is the total value of all final goods and services when all resources are utilized. According to the neo-classical theory, increases in aggregate demand only lead to inflation. The only way to grow the economy is to increase the amount of natural resources, capital goods, technology, and/or the quantity or quality of workers.


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2. Keynesian

  • Aggregate supply is horizontal. Big business and labour unions cause price and wages to be sticky (or in flexible). Therefore, changes in aggregate demand have little impact on inflation. Economic growth can be achieved by increasing aggregate demand. Aggregate demand increases when government spending and investment spending increase.



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Stephanie Powers, Practice Final: Version A, Accessed April 16, 2012