In the classical view, the aggregate supply curve is a vertical line because…
A) prices are sticky.
B) the economy is always able to return to full employment.
C) only shifts in aggregate demand can affect output.
D) shifts in aggregate demand have no impact on prices.
E) All of the above
The correct answer and explanation is:
Correct Answer: B) the economy is always able to return to full employment.
In classical economics, the aggregate supply curve is depicted as a vertical line because it reflects the belief that the economy naturally operates at full employment in the long run. According to this view, output is determined by factors like labor, capital, and technology, not by the overall price level. Therefore, even if prices change, the level of output remains constant at the full-employment level.
The classical economists assumed that wages and prices are flexible. If there is any deviation from full employment, for example during a recession, prices and wages will adjust quickly to restore the economy back to its natural level of output. This automatic self-correcting mechanism is based on the belief that markets are efficient and that any surplus or shortage will be eliminated by changes in wages and prices.
Because of this assumption, shifts in aggregate demand do not impact the real output in the long run. Instead, they only affect the price level. For example, if aggregate demand increases, the price level will rise but real output will stay the same because the economy is already at full capacity. Similarly, a fall in demand will lower the price level but not reduce output.
This vertical shape of the long-run aggregate supply curve highlights a key difference between classical and Keynesian economics. While Keynesians argue that output can be influenced by changes in aggregate demand in the short run, classical economists maintain that such changes only affect prices and have no long-term effect on output.
In summary, the classical view holds that the economy self-adjusts to full employment, making the long-run aggregate supply curve vertical. This is why option B is the correct choice.