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Aggregate Demand Curve and Classical Economy Theory

Aggregate Demand Curve and Classical Economy Theory

Aggregate Demand Curve and Classical Economy Theory

With price level on the y-axis and aggregate quantity on the x-axis, the aggregate supply curve has an upward slope, and the aggregate demand curve has a downward slope.

1) Depending on the changing price level, there is a movement along the aggregate supply and demand curves. Both curves trend upward as the price level rises, but neither curve moves. A decline in total demand and an increase in total supply are present.

2) Increasing consumer confidence boosts the economy’s overall demand for products and services. As a result, the aggregate demand curve shifts to the right while the aggregate supply curve remains unchanged. Hence, the equilibrium price and quantity both rise.

3) The price of inputs for businesses manufacturing goods and services rises when the supply of resources decreases. As a result, the supply declines, and the supply curve moves to the left while the demand curve stays the same. As a result, the equilibrium price rises, and the equilibrium quantity falls.

4) The reduction in pay rate will lower consumer income and total demand. Conversely, this also lowers production costs, increasing overall supply. As a result, the price level declines, and depending on the size of the shifts, the equilibrium quantity may rise, fall, or stay the same.

According to classical theory, the long-run aggregate supply curve is inelastic. At the same time, the Keynesian viewpoint disagrees and claims that the economy can operate below its potential over time.

While classical economics contend that an increase in aggregate demand will only lead to inflation over time and not an increase in real GDP, Keynesians argue for a larger focus on the role of aggregate demand in causing and reversing a recession.

Keynesians advocate for the possibility of a trade-off between unemployment and inflation, whereas the classical perspective is opposed to such a possibility.



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1. Determine whether each of the following would cause a shift in the aggregate demand curve, a shift in the aggregate supply curve, or a shift in neither curve nor a shift in both curves. If a shift is caused, indicate which curve shifts, and in which direction it shifts. What happens to aggregate output and the price level in each case?

Aggregate Demand Curve and Classical Economy Theory

Aggregate Demand Curve and Classical Economy Theory

  1. The price level changes.
  2. Consumer confidence increases.
  3. The supply of resources decreases.
  4. The wage rate decreases.

There is no minimum word requirement for responses. Please label each section of your response with the appropriate number (1, 2, 3, 4).

2.  Compare the classical economic theory that was used prior to the Great Depression to the Keynesian theory used after the Great Depression.

Your response must be at least 200 words in length.

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