The short run aggregate supply curve has 3 important zones:
1. Horizontal Keynesian zone:
- It is the portion of SRAS curve on the left
- It is relatively flat
- In this zone the equilibrium level of real GDP IE far below
potential GDP
- The economy will be in recession
- Cyclical unemployment is high
No much inflationary price pressure
2. Vertical neoclassical zone:
- Vertical portion on right hand side of SRAS curve
- Equilibrium is near potential GDP
- Cyclical unemployment is low
- To increase real GDP the aggregate supply must shift to
right
3. Intermediate zone :
- Upward sloping
- Present between the other two zones
- If AD curve crosses this portion the unemployment and inflation
move in opposite direction
- A shift of AD to right moves output close to potential GDP
- Hence reducing unemployment
- But it leads to higher price level and upward pressure on
inflation