Integration With Keynesian Aggregate Demand
Keynes said that a drop in aggregate demand could lower employment and the price level (an everyday concept in the deflationary depression). In the IS-LM framework of Keynesian economics a negative aggregate demand shock would shift the LM curve left due to rising real wages changing liquidity preference. The Pigou effect would counterbalance this by shifting the IS curve right due to rising real balances raising expenditures.
Read more about this topic: Pigou Effect
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