Unit 3.2·Macroeconomics

Alternative Views of Aggregate Supply (AS)

Variations in Economic Activity: Aggregate Demand and Aggregate Supply

AO2·AO4·Diagram required

Syllabus requirement

Monetarist (vertical LRAS) vs. Keynesian (three-phase AS curve) views of long-run output and price level responses.

Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Required diagram: Monetarist model with vertical LRAS at full employment. Keynesian AS curve showing horizontal, upward-sloping, and vertical segments.

Summary

This topic compares two alternative views of aggregate supply (AS) — the monetarist/new classical perspective with a vertical long-run AS at full employment, and the Keynesian perspective with an AS curve that has horizontal, upward-sloping and vertical sections. The differences matter because they imply different effects of aggregate demand shocks on real output and prices, and therefore different policy responses (demand management versus supply-side policies).

Real-world examples for this unit

Airplane, freight truck and telephone network representing U.S. deregulation

U.S. Deregulation of Transportation and Telecommunications

Market-Based Supply-Side Policy1978 to 1996
U.S. dollar relief payments and government support during the COVID-19 economic downturn

U.S. COVID-19 Fiscal Relief Response

Expansionary Fiscal Policy2020 to 2021
Bank of Japan building with an upward interest-rate symbol

Bank of Japan Interest Rate Hikes in 2025

Contractionary Monetary Policy2025
European Central Bank building with a downward interest-rate symbol

ECB Interest Rate Cuts in 2025

Expansionary Monetary Policy2025