Compare and contrast the shortrun and longrun AS curves for

Compare and contrast the short-run and long-run AS curves for both the Classical and Keynesian models.  Include in your explanation WHY the AS curves look different in the two different theories.

Solution

Answer:

The Classical model assumes long run AS to be a vertical line, implying that it assumes that the economy is always at its full employment production level and price changes do not lead to output changes, since the economy is already producing at its maximum potential level.

The Keynesian model assumes a horizontal-to-upward-sloping demand curve. It assumes that initially in the short run, prices are sticky and output changes do not change prices. However, with time transition to long run, output starts to increase as price increases.

Thus, the only difference between the two is price rigidity.