Separating shift and motion!
- GDP* = potential GDP
- LAS = Long-term Aggregate Supply
- AD = Aggregate Demand
If AD < LAS => Companies lowers their prices => As P↓ demand increases, which means motion along the AD-function.
"Financial/fiscal policy" according to the Classical school of thought, ( financial policy is only a redistribution of resources ).
- When a country increases its public consumption => AD-shifts.
- As GDP is determined by the quantity of capital, employment => Increased public consumption.
Which means that some other kinds of consumption has to be displaced, such as private consumption.
As C↓ => AD-shifts inwards "Crowding Out".