In this article we will discuss about the classical theory of income and employment. The basic contention of classical economists was that "given flexible wages and prices, a competitive market economy would operate at full employment. That is, economic forces would always be generated to ensure that the demand for labour would always equal its supply". In the classical model [...]
It may be noted that the fiscal policy change (a change in taxes or government expenditures) will shift the IS curve, and monetary policy change will shift the LM curve. a. Monetary Policy: Monetary policy attempts to stabilise the aggregate demand in the economy by regulating the money supply. An expansionary monetary policy is needed to stimulate the economy. This [...]
Now we turn to see what will happen to aggregate output if investment, instead of being fixed at a certain level depends on the interest rate? As soon as interest rate comes into our analysis, we enter the money market in which interest rate is determined. Increased government expenditure financed by budget deficits i.e., printing of additional notes, produces an [...]