. Identify the three ranges of the aggregate supply curve.?

Question

Explain the impact of an increase in aggregate demand curve in each segment.

Answer 1

Classical (near-horizontal, observed on the left side of the graph), Keynesian (nearly vertical, observed on the right side of the graph), and intermediate (upward-sloping, observed in-between the other two).

In the classical range, an increase in aggregate demand leads to increase in real output, with very little inflation. In the Keynesian range, the effect is reversed; an increase in aggregate demand leads to inflation (rise in price level), with very little increse in real output. In the intermediate range, both effects are present; real output expands, and price level rises as well.