- GDP* = potential GDP
- LAS = Long-term Aggregate Supply
- AD = Aggregate Demand
Classical theory - 1930s
According to the Classical school of thought, ( financial policy is only a redistribution of resources ).
- Flexible prices.
- Supply is given.
- Unemployment is voluntary.
- Government demand increase (G) displaces private demand (I).
- The economy is determined by the supply-side ( utbudsbestämdSwedish ) which means that fiscal- and monetary policies are pointless in order to influence GDP.
- G↑ => AD-shift = GDP↑
- As GDP increases => Demand for money increases => Interest rate↑ => I↓ => AD-shift
G↑ corresponds by decreased investments I↓ => ΔGDP = ±0