Path Dependence and Policy Effectiveness
If the LAS is path-dependent, then that might open the possibility for an aggregate demand policy that could be effective. Starting from the previous figure, suppose that the government adopts an extremely expansionary fiscal and monetary policy, shifting the Aggregate Demand curve to something like AD in the figure below, so that production is stimulated to shift over to the neighborhood of the old LAS curve, LAS1.
Figure 9: Effective Expansionary Aggregate Demand Policy
At first this might come as a surprise, so that the people would move up the short run aggregate supply curve SAS1. Eventually, though, people would no longer be surprised, and the LAS curve would shift from LAS1 to LAS2. Some Keynesian-oriented economists argue that that's exactly what happened in the big build-up of military spending in World War II. It also explains why the economy did not return to a depression after the war -- something that was very puzzling at the time -- since by the end of the war, the LAS curve had shifted to a much higher level of production, and as production is highly permanent, tended to remain at that level.
(If people have Rational Expectations and understand the policy, they might not be surprised even at first. In that case the LAS would shift immediately and without even causing the minor inflation that comes from moving along the SAS curve).
One Interpretation
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