ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -CLASSICAL RANGE: The vertical segment of the Keynesian aggregate supply curve that reflects the independence of full-employment aggregate output (or gross domestic product) to the price level. Shifts of the aggregate demand curve in this range lead to changes in the price level, but not changes in aggregate output.

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: -(3) The classical range is the vertical segment of the aggregate supply curve. It coincides with the full-employment output. Because output is at its maximum, increases in aggregate demand will only cause a rise in the price level.

Detailed explanation-4: -The classical range of aggregate supply is vertical because of the proposition of the classical theory that prices will adjust so that output is always at full employment. In this range, expanding aggregate demand will cause inflation, while contracting aggregate demand will reduce inflation.

Detailed explanation-5: -The Classical model shows the aggregate supply curve as vertical because this model holds that the economy is at its full employment level. That means that even if demand increases, firms can’t hire new workers and expand because everyone is already working.