Social Sciences and History / Unit 15 SSH 1413 worked example, 60 to 90 seconds
Keynesian, Intermediate, Neoclassical: Which Zone?
The idea
The exam describes where an economy sits and asks which economist's law applies, and the anchor divides the short-run aggregate supply curve into three zones. The Keynesian zone, on the left where GDP is far below potential, is flat: movements in aggregate demand change output and employment with little effect on the price level, so Keynes's law, demand creates its own supply, holds. The neoclassical zone, on the right at or near potential, is steep to vertical: movements in aggregate demand change the price level with little effect on output, so Say's law, supply creates its own demand, holds. The intermediate zone between them slopes upward: a rise in aggregate demand raises both output and the price level, a fall lowers both.
In practice
Given "deep recession, idle factories, a stimulus raises output without inflation", the Keynesian zone. Given "full employment, a stimulus raises only prices", the neoclassical zone. Given "recovery under way, more demand brings some growth and some inflation", intermediate. Ask how far output is from potential, then whether the curve there is flat, sloped, or steep.
Where people slip
The trap is treating the zones as schools; they are regions of one curve, and the anchor says mainstream economists use both laws at different horizons. The second trap is the natural rate, which sits inside potential GDP at the zone boundary.
Your place on the trail
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