Assumptions and Implications of AS Models

This topic compares the assumptions and policy implications of the monetarist/new classical and Keynesian AS models. Monetarists assume wages and prices are flexible so the economy self-corrects to full employment (LRAS vertical at potential output), while Keynesians assume wages are sticky downwards so persistent recessionary gaps can occur and justify government intervention via expansionary fiscal or monetary policy. Understanding these differing assumptions matters for choosing appropriate macroeconomic policy tools and for predicting long-run vs short-run outcomes.