AGGREGATE DEMAND CURVE IN THE CONTROVERSY BETWEEN KEYNESIAN SCHOOL AND CLASSICAL SCHOOL

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TAFAZZOLI F.

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Journal: PEYKE NOOR JOURNAL Year:2005 | Volume:2 | Issue:4 (ECONOMICS) Page(s): 2-15

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Title

AGGREGATE DEMAND CURVE IN THE CONTROVERSY BETWEEN KEYNESIAN SCHOOL AND CLASSICAL SCHOOL

Author(s)

TAFAZZOLI F. | Issue Writer Certificate

Keywords

REAL-BALANCE EFFECTQ4

REAL WEALTH EFFECTQ4

PIGOU EFFECTQ4

FALLACY OF COMPOSITIONQ4

STICKY PRICES AND WAGESQ4

WORKERS’ MONEY ILLUSIONQ4

EXPECTATIONS - AUGMENTED PHILLIPS CURVEQ4

INCONSISTENCY BETWEEN SAVING AND INVESTMENTQ4

ENDOGENOUS MONEYQ4

EXOGENOUS MONEYQ4

Abstract

Economists usually use the two forces of market supply and demand for examining the pedogogical problems in Economics. As in the micro market for any competitive good, and upward sloping supply curve along with a downward sloping demand curve determine equilibrium in the market, in the macro market for final goods and services, a positively-sloped aggregate supply curve along with a negatively-sloped aggregate demand curve determine the equilibrium in the market. By using these two curves in this market, macroeconomists analyze the effects of supply and demand shocks as a whole and the impacts of monetary and fiscal policies on prices and output in particular.Under these conditions, the controversy between the two Keynesian and Classical Schools is revealed in the shape of aggregate supply curve and also the shape of aggregate demand curve which upon combining the latter curve with the different shapes of aggregate supply curves, opposite results can be obtained in regard to the effectiveness of monetary and fiscal policies used.In the debate running between the two schools of thought, first the Classical long-run perspective stands for and aggregate supply curve which is completely inelastic at the full – employment level of output and therefore an increase or decrease in the aggregate demand, assuming fully flexible prices, would adjust the aggregate quantity demanded to conform with agrregate supply; second the Keynesian short-run view corresponds with an aggregate demand schedule which, due to the presence of “liquidity trap” in Keynesian money market, is completely vertical and therefore inelastic and assuming a completely inelastic Classical aggregate supply curve, and excess or shortage of supply, supposing full flexibility in prices, should, as a rule, cause necessary changes in prices and proceed to adjust the aggregate quantity supplied to conform with aggregate demand, but it is not so.The main objective of this article is first to derive the diminishing aggregate demand curve from the IS-LM model and also on the basis of “real balance or wealth effect” or “Pigou Effect” which will be analytically presented, and second to evaluate the following conditions for deriving such a diminishing aggregated demand curve: 1) When under Keynesian Economics, the investment function is completely inelastic relative to the interest rate and also when the money demand function becomes completely elastic at a given, minimum interest rate, the aggregate demand curve loses its diminishing slope and becomes completely inelastic with its slope being equal to infinity. 2) In times of severe recessions, when markets are not active but still, prices ususally decline: with decreasing prices, if consumers predict that prices would decrease more in the future, under the present recessionary conditions, the diminishing slope of aggregate demand schedule turns into an increasing one. 3) Deriving a negatively-sloped aggregate demand from the IS-LM model is not devoid of problems, as it is benig accompanied by removing the assumption of rigid prices and wages. 4) When money supply is assumed to be endogenous in Keynesian money market, the derivation of a negatively-sloped aggregate demand curve is uncertain.

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APA: Copy

TAFAZZOLI, F.. (2005). AGGREGATE DEMAND CURVE IN THE CONTROVERSY BETWEEN KEYNESIAN SCHOOL AND CLASSICAL SCHOOL. PEYKE NOOR JOURNAL, 2(4 (ECONOMICS)), 2-15. SID. https://sid.ir/paper/128531/en

Vancouver: Copy

TAFAZZOLI F.. AGGREGATE DEMAND CURVE IN THE CONTROVERSY BETWEEN KEYNESIAN SCHOOL AND CLASSICAL SCHOOL. PEYKE NOOR JOURNAL[Internet]. 2005;2(4 (ECONOMICS)):2-15. Available from: https://sid.ir/paper/128531/en

IEEE: Copy

F. TAFAZZOLI, “AGGREGATE DEMAND CURVE IN THE CONTROVERSY BETWEEN KEYNESIAN SCHOOL AND CLASSICAL SCHOOL,” PEYKE NOOR JOURNAL, vol. 2, no. 4 (ECONOMICS), pp. 2–15, 2005, [Online]. Available: https://sid.ir/paper/128531/en

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