The classical view is that the LRAS curve is vertical. A decrease in AD would reduce output and employment in the SR. As unemployment rises, wages adjust downwards as workers are more likely to accept a lower wage. This increases the demand for labour and pulls the economy back to full employment output in the LR
The Keynesian view is of an inverted L shaped LRAS curve. Wages are ‘sticky downwards’ - workers will not simply accept lower wages because unemployment is higher. This makes it difficult for the economy to adjust and equilibrium may be reached at a level of output below full employment. The horizontal part of the curve shows how, at low levels of real GDP, it is possible to expand output without putting upward pressure on the price level due to underutilisation of resources. The vertical part of the curve shows the economy reaching its full productive capacity
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