Question

Discuss the three ranges of the aggregate supply (AS) curve. What could cause the AS curve to shift to the left? What impact would a leftward shift of the AS curve have on the economy?

Answer 1

There are three ranges of supply curve:

• Keynesian Range: Supply curve is horizontal in this phase where producers supply all goods at a fixed price.
• Intermediate Range: Supply curve is upward sloping in this phase.
• Classical Range: Supply curve is vertical in this phase where economy is opearting at full employment level.

When aggregate supply curve shifts to its left from AS to AS1 while aggregate demand remains the same, it will raise the price from P to P1 while output level reduce from Y to Y1.