The classical theory of aggregate supply where markets are perfectly flexible
A)may or may not be compatible with the Keynesian system.
B)is easily added the IS-LM framework of aggregate demand.
C)is fundamentally incompatible with the Keynesian system.
D)is consistent with the IS-LM framework if all shocks are to the IS curve.
E)none of the above.

Question

Quizplus · Accepted Answer

The classical theory of aggregate supply assumes that markets are perfectly flexible and that wages and prices adjust quickly to changes in demand and supply. This is fundamentally incompatible with the Keynesian system, which emphasizes the role of market imperfections, such as sticky wages and prices, in explaining why economies may remain stuck in a recessionary or inflationary equilibrium. Therefore, the classical theory of aggregate supply cannot be easily integrated into the Keynesian framework.

The Classical Theory of Aggregate Supply Where Markets Are Perfectly