ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The aggregate supply curve shows the level of real GDP that the economy will produce at different possible price levels. (1) The Keynesian range of the curve is horizontal because neither the price level nor production costs will increase when there is substantial unemployment in the economy.

Detailed explanation-2: -Aggregate supply is made of three sections: the classical range is vertical, the Keynesian range is horizontal and the intermediate range is upsloping. The aggregate supply can be thought of as the combination of all the goods that firms produce: it is GNP if the government is ignored.

Detailed explanation-3: -Spare capacity occurs when a business is not making full use of its available capacity – there are spare factors of production including land, labour and capital. When an economy has plenty of spare capacity, short run aggregate supply (SRAS) is elastic, and the output gap is negative.

Detailed explanation-4: -The Keynesian aggregate supply curve shows that the AS curve is significantly horizontal implying that the firm will supply whatever amount of goods is demanded at a particular price level during an economic depression.