Quiz 8: Keynesian System Iv: Aggregate Supply and Demand


The classical aggregate demand schedule depends only on the level of the money stock.The aggregate demand curve in the Keynesian system depends on the quantity of money,and on such variables as the level of government spending,the level of tax collection,and the level of autonomous investment expenditures.

Prices and output fell.Money wages rose,but not as much as the price level fell so that real wages fell.This is consistent with the Keynesian flexible-price model in which money wages are inflexible.In this model,a fall in aggregate demand would reduce the price level and output while increasing real wages.

In the IS-LM model,an increase in the price level shifts the LM curve to the left and reducing income.Thus,there is a negative relationship between the price level and the level of income,illustrated by the aggregate demand curve.