Classical and Keynesian Demand and Supply

Nature of Curves and Shifts Fixed vs Flexible Prices Determinant factors Click to edit Master subtitle style Consumption theories Investment theories Role of Money, Money Illusion, Liquidity Trap Crowding Out, Trade Offs Policy Implications

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Supply Capacity of the Economy

Costs of Production Technology Education and Training Incentives Tax regime Capital stock Productivity Labour Market
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Long-Run GDP Growth and Inflation

2. . . . and growth in the money supply shifts aggregate demand . . . Pri ce Lev el Longrun aggregat e suppl y, LR 1 AS 9
8 0

LR AS

1 9 9 0

LR AS

20 00

P 20 4. . . . and ongoing inflation.

00

1. In the long run, technologica l progress shifts long-run aggregate supply . . . Aggregat e Demand A , D A D A D 0 Y 19
80 19 90

P 19
90 20 00

P 19
80

Y 19
90

1 9 8 0

Y 20
00

3. . . . leading to growth in 11/1/12 output . . .

Quantity of Outp ut
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A Contraction in Aggregate Demand

2. . . . causes output to fall in the short run . . . Pric e Lev el

Longrun aggregat e suppl y

Short-run aggregate supply, A S A S 2 3. . . . but over the shorttime, run aggregatesupply curve shifts . . . 1. A decrease in aggregate demand . . . Aggregate demand, A D Quantity of Outp ut
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P P 2 P 3 B

Y 2

A D 2 4. . . . and output returns to its natural 11/1/12 rate.

Why the Aggregate-Demand Curve Is Downward Sloping

The Price Level and Consumption: The Wealth Effect The Price Level and Investment: The Interest Rate

Effect
The Price Level and Net Exports: The Exchange-Rate

Effect

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Sustained Growth
Inflation AS AS1
Sustained growth (not to be confused with sustainable economic growth) occurs when AS and AD rise at similar rates national income can rise without effects on inflation

2.0%

AD2 AD Y1 Y2

Real National Income 11/1/12

GDP trend Growth and Cycles for Indian Economy

12

10

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Business Cycles
Four Phases Causes:

changes in capital expenditures inventory adjustments Innovation and imitation credit and loan policies of commercial banking. external shocks

Climate and natural factors Monetary Theory Overinvestment Theory Multiplier Accelerator Theory
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