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The classical range of aggregate supply is vertical because of the proposition of the classical theory that prices will adjust so that output is always at full employment. In this range, expanding aggregate demand will cause inflation, while contracting aggregate demand will reduce inflation.
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There are many sectors of the economy where all adjustments take place through price changes. One can think of all goods related to fashion: if a dress is in high demand, it will be priced very high; but if the dress is out of fashion, the price will be very low and, eventually, it will not be produced at all. |
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