Separating shift and motion!

  • GDP* = potential GDP
  • LAS = Long-term Aggregate Supply
  • AD = Aggregate Demand


IS-LM diagram: Motion

If AD < LAS  => Companies lowers their prices => As P↓ demand increases, which means motion along the AD-function.


IS-LM diagram: Shift

"Financial/fiscal policy" according to the Classical school of thought, ( financial policy is only a redistribution of resources ).

  1. When a country increases its public consumption => AD-shifts.

  2. 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".

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