What is happening at the horizontal section of aggregate supply (AS)?

Question

BlackTom AI · Accepted Answer

In the Keynesian view, the horizontal (flat) section of the aggregate supply (AS) curve corresponds to an economy operating well below potential output with many idle resources. Wages and prices are "sticky" downward in this range, so firms respond to higher aggregate demand by increasing real output and employment rather than by raising the general price level.

Step-by-step reasoning:
1. Knowledge points: The AS curve has three conceptual ranges — horizontal (Keynesian), upward-sloping (intermediate), and vertical (classical). The horizontal range occurs at low levels of output/unemployment; prices are rigid and firms have spare capacity. Aggregate demand (AD) increases here raise output without changing the price level.
2. Apply to the choices: If AS is horizontal, firms can expand production using existing unused capital and unemployed labor. That implies there are a lot of unused resources available for production to rise.
3. Logical consequences: Because resources are idle, marginal cost pressures are low; firms hire more and increase output rather than increase prices. Thus output can and does increase when AD rises in this range.
4. Why the correct option is correct: "there are a lot of unused resources" captures the defining feature of the horizontal section — substantial unemployment and unused capital allow output expansion without price increases.

Why other options are incorrect:
- "total output cannot increase" is false: in the horizontal Keynesian range, output can increase substantially as AD rises.
- "there is little spare production capacity" contradicts the defining condition of the horizontal range; in fact spare capacity is large.
- "all of these" is wrong because the other statements are incorrect or inconsistent with the horizontal AS.

Conclusion: The correct answer is "there are a lot of unused resources," which matches the provided answer.

What is happening at the horizontal section of aggregate supply (AS)?Single choice

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