In the classical model, the aggregate supply curve
A) is horizontal.
B) is positively sloped.
C) is consistent with the natural rate of unemployment.
D) is not related to the employment rate.

Question

Quizplus · Accepted Answer

The classical model posits that supply creates its own demand, meaning that in the long run, the economy will produce at its potential output determined by factors such as capital, labor, and technology. This potential output level is also known as the natural rate of unemployment. Therefore, the classical aggregate supply curve is consistent with the natural rate of unemployment, representing a vertical curve at potential output level. This means that in the long run, changes in aggregate demand will only affect the price level and not output. Therefore, the aggregate supply curve in the classical model is not horizontal (A), positively sloped (B), or unrelated to employment rate (D).

In the Classical Model, the Aggregate Supply Curve