The aggregate supply curve in the neoclassical model

Full Answer Section The neoclassical perspective on macroeconomics emphasizes the importance of market forces in determining economic outcomes. Neoclassical economists believe that the economy will naturally tend towards equilibrium, and that government intervention is often counterproductive. Acceptance of the neoclassical approach does not imply that the Keynesian approach is wrong. The Keynesian approach is based on the assumption that wages and prices are sticky, which means that they do not adjust quickly to changes in the price level. This can lead to situations where the economy is not at equilibrium, and where government intervention can be helpful. However, the neoclassical approach is based on the assumption that wages and prices are flexible, which means that the economy will naturally tend towards equilibrium. In this case, government intervention is not necessary, and may even be counterproductive. The neoclassical and Keynesian approaches to macroeconomics are two different ways of thinking about how the economy works. The neoclassical approach emphasizes the importance of market forces, while the Keynesian approach emphasizes the role of government intervention. Both approaches have their strengths and weaknesses, and it is important to understand both in order to make informed economic decisions.

Sample Answer The aggregate supply curve in the neoclassical model is a vertical line at the level of potential output. This means that in the neoclassical model, the quantity of output supplied is determined by factors other than the price level, such as the quantity of labor, capital, and technology. The aggregate supply curve is drawn vertically because the neoclassical model assumes that wages and prices are flexible. This means that if the price level rises, wages will also rise, and businesses will be able to afford to produce the same amount of output.