‘Full employment’ has to be interpreted according to the government’s other economic objectives, chiefly the price level. Analysis has, therefore, to consider how AD and AS (aggregate supply) are related to the price level (Fig. 31.1). Spending on real output is likely to expand as the price level falls because: Consumers’ cash balances can purchase more. A reduced transactions demand for money leads to a fall in the rate of interest, encouraging higher C and/. More price‐competitive home‐produced goods expand X and reduce M (e.g. cars).
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