Answer:
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Explanation:
The AD-AS framework is based on the Keynes's <em>The General Theory of Employment, Interest and Money</em> and shows a simplified macroeconomic model.
Keynes believed that the economy was not self regulating like classical economists stated, since wages and prices tend to be inflexible (wages are extremely inflexible). Since wages and prices are a vital component of the economy, since they cannot adjust themselves as easily as the classical economic model believes, the economy will be inherently unstable.
Even when the economy is not growing or is in the middle of a recession, workers will not accept a decrease in their wage. To be honest, who would? Remember the CEOs, CFOs, COOs, etc. of GM and Chrysler that earned tens of millions while their companies went bankrupt? If they didn't take a cut on their pay, why should a normal average worker do?
Prices cannot be freely adjusted by the companies since competition exists. Imagine all the fast food restaurants decided to increase their prices by 20% because of high inflation, etc., but Burger King decides to keep their prices still. Burger King restaurants would have an excess of clients while the rest would see a significant decrease in their sales. The more competition, the more difficult it is to raise the price of your products.
The classical economic model is great in theory, specially in the long run, but in the real world it doesn't work that well.
