Figure 1: Hayek\'s (Classical) AD-AS Model The Classical AS curve Level AS Pl AD
ID: 1142645 • Letter: F
Question
Figure 1: Hayek's (Classical) AD-AS Model The Classical AS curve Level AS Pl ADT AD National income (real GDP) 1-Why does this aggregate supply curve always lead to an equilibrium level of national output equal to the full-employment level of real GDP? 2-Hayek says that markets will heal themselves and that government should not intervene. How does the AD-AS model reflect Hayek's idea that governments cannot increase real GDP beyond the level that the free market economy is able to produce? 3-Do you believe that the Hayek's classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not?Explanation / Answer
1.
In a classical economy as Hayek's model, the economy is always at full employment level of output hence aggregate supply is a vertical slope. It is based on the Say's law that supply creates its own demand and once the economy reaches its potential then any change in output or aggregate demand would lead to an increase in price. As the AD-AS graph shows a shift in the aggregate demand curve where output remains same and price level rises.
2.
The model says that the government should not intervene and the market would adjust automatically. The model reflects the same as when a government uses fiscal policy and increase aggregate demand still output does not expand as it is considered in the model that the long run aggregate supply curve is determined by free market and economy will remain in the equilibrium level of output. Also in case of recession, the economy is self-adjusting and will move towards full employment in the long run.
3)
Factors that cause shift or change in the supply curve in the classical framework are supply shocks like economic shocks, natural calamities affecting the supply of goods and services, changes in input prices. A major reason which causes a shift in long-run aggregate supply is a structural change.
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