Answer 1 :

According to the classical perspective, economy is self regulating. Classical economists

believes that economy when stuck in recession where actual output produced in less than the
real output, do not need government intervention as economy is self regulating. At the
recessionary gap the wage rates is flexible hence it moves downward where the wage rate
decreases to lead the SRAS curve shift rightwards. Hence it brings back the economy to the
long run equilibrium. There is not need for the intervention of government and economy
automatically moves the SRAS curve to reach at full employment.

During the time of inflationary gap, classical economists believe that as the wage rate is flexible
it increases to shifts the SRAS curve leftwards which in turn moves the economy out of the
inflationary gap.

In this way classical economists believe that the economy is self regulating.
The economy was initially at recessionary gap at Q1 . The wage rages fall and the SRAS curve
shifted towards rightwards moving the economy in ling run equilibrium.

Answer 2:

According to Keynesian model wages are inflexible and they are sticky. Hence the economy is
not swlf regulating and it needs government intervention. The government needs to intervene
and increase the aggregate demand of the total economy. The government creates policies
such as fiscal and monetary policies to change the aggregate demand of the economy when
they are not in long run equilibrium. When the economy is facing recessionary gap, government
implements expansionary fiscal and monetary policy to bring back the economy to long run
equilibrium.
Assume the economy starts off at the natural level of real GDP, which corresponds to Y 1 in
Figure. An aggregate expenditure curve, AE 1, is associated with this level of real GDP.
Assume that autonomous spending falls from A 1 to A 3, shifting the AE curve downward from
AE 1 to AE 3. A decrease in aggregate demand from AD 1 to AD 2 reflects this loss in
autonomous expenditure. Equilibrium real GDP has declined from Y 1 to Y 3 at the same price
level, P 1. The junction of the SAS and AD 2 curves, on the other hand, occurs at the lower
price level, P 2, indicating that the price level is falling.The fall in the price level means that the
aggregate expenditure curve will not fall all the way to AE 3 but will instead fall only to AE 2.
Therefore, the new level of equilibrium real GDP is at Y 2, which lies below the natural level, Y
1.According to Keynes, prices will not fall further below P 2 because employees and other
resources would oppose any pay cut, preventing suppliers from boosting their supply. As a
result, unlike in classical theory, the SAS curve will not shift to the right, and the economy will
remain at Y 2, where some of the economy's employees and resources are jobless. These
jobless employees and resources are unable to purchase products and services because they
are unable to make a living. As a result, the aggregate expenditure curve is stuck at AE 2,
preventing the economy from reaching its natural real GDP level.

Quiz

At the point when the cost level changes and firms produce more because of that, we move
along the SRAS curve. Yet, any change that makes creation different at each conceivable value
level will move the SRAS curve. Occasions like these are classified “shocks” since they aren’t
expected.

For instance, envision the cost of work startlingly gets more costly. In light of that shock, the
SRAS curve diminishes (movements to one side). Curiously, this occurs assuming firms
anticipate that this will happen as well. Assuming you see it coming, you change your
assumptions appropriately! Assuming that elements of creation get less expensive, or makers
figure they will get less expensive, then SRAS increments.

For example, imagine the price of labor unexpectedly gets more expensive. In response to that
shock, the SRAS curve decreases (shifts to the left). Interestingly, this happens if firms expect
that this will happen too. If you see it coming, you adjust your expectations accordingly! If
factors of production get cheaper, or producers think they will get cheaper, then SRAS
increases.

Shift SRAS by thinking of SPITE:

Subsidies for businesses

Productivity

Input prices

Taxes on businesses

Expectations about inflation