Shifting Aggregate Demand

This section uses concepts from Chapters 22-25 on Income-Expenditure or "Keynesian" Equilibrium.

For the Pigou curve, we have to think in terms of rates of change, and that means we start with a changing Aggregate Demand Curve. We have learned that several kinds of changes can shift the Aggregate Demand Curve:

Changes in autonomous expenditure
- autonomous consumption
- investment
- net exports
- government purchases of goods and services
Changes in taxes
Changes in the nominal money supply

Let's look back at our example of an aggregate demand curve shifted by a change in the money supply, as shown (again) in Figure 6.

Figure 6: Changing Aggregate Demand, with More Detail

The orange lines show some assumptions for an example:

Year 1

M=500
price level=60

RGDP=4440

Year 21(hypothesis 1)

M=1000
price level=80

RGDP=4995

Year 2 (hypothesis 2)

M=1000
price level=100

RGDP=4662

The two hypotheses define two different points on the Pigou Curve:

hypothesis 1

inflation=33.3%
RGDP growth=13%

hypothesis 2

inflation=66.7%
RGDP growth=5%

So we see, indeed, an inverse relationship between the rate of inflation and the rate of growth of GDP demanded. The Pigou curve for this example, and the two points just found, will be shown on the next page.

Next: Pigou Curvefor this Example