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What are the three zones of the short-run aggregate supply (SRAS) curve? Explain.

What are the three zones of the short-run aggregate supply (SRAS) curve? Explain.

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Answer #1

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

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