Graphical illustration of the classical theory as it relates to a decrease in aggregate demand

Graphical illustration of the classical theory as it relates to a decrease in aggregate demand

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Graphical illustration of the classical theory as it relates to a decrease in  aggregate demand.  Figure 2  considers a  decrease  in aggregate demand from  AD 1  to  AD 2 Figure 2 Classical theory of output and price level adjustment during a recession The immediate, short-run effect is that the economy moves down along the  SAS  curve labeled  SAS 1 causing the equilibrium price level to fall from  P 1  to  P 2 , and equilibrium real GDP to fall  below  its  natural level of  Y 1  to  Y 2 . If real GDP falls below its natural level, the economy's workers and 
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Unformatted text preview: resources are not being fully employed. When there are unemployed resources, the classical theory predicts that the wages paid to these resources will fall. With the fall in wages, suppliers will be able to supply more goods at lower cost, causing the SAS curve to shift to the right from SAS 1 to SAS 2 . The end result is that the equilibrium price level falls to P 3 , but the economy returns to the natural level of real GDP....
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This note was uploaded on 11/18/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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Graphical illustration of the classical theory as it relates to a decrease in aggregate demand

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