Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion The Classic Aggregate Supply Model The classical aggregate supply model is an economic theory that describes how the level of prices and output in the economy is determined by factors of production and technology. This theory assumes that markets will always reach a long-run equilibrium and that the economy will move toward a long-term equilibrium point even though there may be short-term fluctuations. The classic aggregate supply model is based on three main assumptions: 1. Assumption about price flexibility: This theory assumes that prices can change flexibly and quickly in response to changes in demand and supply. 2. Assumptions about factor flexibility: This theory assumes that factors of production such as labor, capital, and raw materials can also change flexibly in response to changes in demand and supply. 3. Assumptions about long-run equilibrium: This theory assumes that markets will always reach long-run equilibrium and that the economy will move toward a long-run equilibrium point even though there may be short-term fluctuations. In the classical aggregate supply model, the aggregate supply curve (AS) is a vertical curve indicating that the quantity of output supplied in the economy is not affected by the price level, but only by factors of production such as labour, capital and technology. In the long run, changes in the price level will only affect the level of real output in the economy, not the amount of output supplied. In the classical aggregate supply model, an increase in aggregate demand in the short run will increase prices and result in a temporary increase in output, but in the long run, the price level will return to its initial level while output will return to the long-run equilibrium level. In the long run, only the factors of production will affect the level of real output in the economy. In the classical aggregate supply model, the government's influence on the economy is very limited, because the government cannot influence the factors of production and technology that affect aggregate supply in the long run. Therefore, fiscal and monetary policies will not have long-run effects on output and price levels. The classical aggregate supply model also suggests that short-run fluctuations in aggregate demand are caused by temporary disturbances, such as changes in consumption or investment. In the long term, this kind of fluctuation will be resolved and the market will return to a long-term equilibrium level. The classical aggregate supply model has the advantage of explaining how markets will achieve long-run equilibrium and how short-run fluctuations can be overcome. However, this model has the disadvantage of ignoring the importance of expectations and human behavior in determining prices and output. In addition, this model does not consider the possibility of longterm imbalances in the economy, such as unemployment and inflation. In the classic aggregate supply model, there are several important assumptions that must be met to maintain model consistency: a) Factors of production are always available: This model assumes that the factors of production are always available in sufficient quantities and are not disturbed by external factors such as war or natural disasters. b) No government influence: This model assumes that the government has no significant influence on the economy, either in the short or long term. c) Rapid adjustment of prices and wages: This model assumes that prices and wages will adjust rapidly to fluctuations in supply and demand. This is especially important for maintaining short-term balance. d) Fixed inflation rate: This model assumes that the inflation rate is fixed and does not change in the long run. Despite its drawbacks, the classical aggregate supply model remains widely used in macroeconomics because of its ability to explain how markets will achieve long-run equilibrium and how short-run fluctuations can be overcome. However, this model also needs to be developed and improved to accommodate important changes in today's global economy. Several criticisms have also been made of the classic aggregate supply model, including: 1. Irregularity of the aggregate supply curve: This model assumes that the aggregate supply curve always remains straight and vertical in the long run, but in reality, this curve may change depending on changing economic conditions. 2. Lack of concern for aggregate demand: This model assumes that aggregate demand will always reach long-run equilibrium without considering factors such as unemployment or consumption levels. 3. Lack of concern for the impact of government policies: This model ignores the impact of government policies on the economy, such as monetary and fiscal policies. 4. Does not account for structural changes: This model does not account for structural changes in the economy, such as technological advances or changes in consumer preferences. In this regard, the classical aggregate supply model needs to be updated and developed to accommodate these factors and provide a more complete understanding of economic behavior.