December 11, 2011

Theory of Aggregate Supply and Demand

Classical Theory:

Total output is insensitive to the overall price level. Prices change quickly to erase any excess supply or demand in markets.

Kenesian theory:

The economy can experience long periods of persistent unemployment. Monetary and fiscal policies help in increasing the employment.

In Kenesian theory, investment determines output or investment has a multiplier effect on output.

UC Berkeley Lecture





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