1.

Why does the neo

classical aggregate supply curve always lead to an
equilibrium level of national output equal to the full-employment level of real GDP?
It leads to equilibrium because the model implies that an increase in aggregatedemand will lead to an
increase in output and therefore prices. However, in thelong run the economy would have gone towards
full employment naturally andthe aggregate supply curve would be vertical as the increase in price would
beinflationary.
2. The vertical AS curve above is sometimes referred to as the flexible
-wage and flexibleprice model of the macroeconomy. Why must wages and prices be perfectly
flexible for this model to be an accurate r
epresentation of a nations economy.
Flexible wages and flexible employment helps to ensure that markets clearrapidly eliminating any excess
supply or demand, so economies automaticallymove into long run equilibrium at potential output. As this
economic theorystates that forces are natural and aggregate supply and aggregate demand meetnaturally,
wages and prices adjust in the long run to balance the market.
3. Hayek was an advocate for free markets, he felt that government intervention in
a nations e
conomy would only interfere and disrupt the efficient allocation ofresources. How does the model
above reflect his belief that governments cannot
improve a nations level of output beyond what the free market is able to achieve?
The level of aggregate supply is identical, regardless of any governmentintervention, meaning that
although there may be changes of the price level ofthe economy, the real GDP cannot be altered by the
government.
4. Do you believe that the neo-classical model of aggregate supply is representativeof the real world?
Why or why not? What evidence is there from recent history that the model is or isnot accurate?
No as the model does not examine the role of growth and development of anational economy and instead
is too orientated towards microeconomics. Anexample is the downturn in the United States between 19291933 whereingovernment intervention was necessary to stimulate the economy and therecovery could not
occur without it.
Parte 3

1. How does the above model represent a compromise between Keynes' and
Hayek's view of aggregate supply?
The graph above is a mixture of the Keynesian model and Hayeks model. In
this graph the aggregate supply curves intersect with each other at the AD2
point.
2. Why are there two aggregate supply curves? What is the difference
between the two?

Hayeks model can be called as neo-classical where the inflation rate is high
and it is generally stable but in the Keynesian model the GDP can increase
without government intervention. The actual difference is that in Keynesian
model there are some changes in supply curve where there is not much
change in the Hayeks supply.
3. What happens in the SHORT-RUN when AD falls from AD2 to AD3 to the
price level and output? What will happen in the long-run? In
macroeconomics, the short-run is known as the "fixed-wage period" and the
long-run the "flexible-wage period". The main factor that can shift the SRAS
curve is the level of wages in the economy (in other words, a change in
wages will shift the SRAS). How does this help explain the adjustment from
the short-run equilibrium and the long-run equilibrium following a fall in AD?,
If we consider these Keynesian and Hayeks models we can say that in short
run the prive level and output decreases while going from AD2 to AD3. In the
long run prive level is stil increasing but this time the output is constant.
4. What happens in the SHORT-RUN when AD increases from AD2 to AD1?
What will happen in the long-run? How does the long-run flexibility of wages
explain why output always seems to return to its full employment level of
output in the long-run?
In short run the prive level is increasing and the output increasing
propotionally. In the long run prive level is increasing but there is a difference
between short run and the long run in terms of output. The output is
increasing but not as much as prive level because of the wages etc.
5. What does the model above indicate about the possible need for
government intervention to help an economy achieve its macroeconomic
goals of full-employment and price level stability in the short-run?