ON THE KEYNES AND PIGOU EFFECTS IN AGGREGATE DEMAND THEORY

The standard approach to the derivation of aggregate demand employs the IS-LM model with a flexible price level in which distinctions are drawn between the Keynes and Pigou effects. This paper is an extension of this traditional analysis and demonstrates that the slope of the economy's aggregate demand function may be dichotomized and specified as the summation of these two effects. This result is then used to examine the impact of different conditions within the product and money markets. An expression for the price level elasticity of aggregate demand is also derived.