Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

Interest Rate
LM
E
IS
Income / Output
Price Level
MDS
MDS
0
Income / Output
1
2
IS
i
i
1
2
1
2
E
E
3
3
1
E
2
E
E
3
0
P
Y
1
2
P
Y
Y
Y
Y
Y
1
2
3
Y
Y
Y
Y
Y
Y
LM
1
2
FIGURE 9.3: SHIFT IN THE MDS 
As a result of the real balance effect IS curve shift to IS and 
there is a shift in MDS to MDS . It is flatter than MDS because fall in 
price increase aggregate demand not only through lower interest 
rate but also through real balance effect. The main conclusion 
remains unaffected that is the macroeconomic demand schedule is 
downward slopping relating to price level and the level of real 
income. 
The MDS incorporates two conditions. The first is that 
planned spending equal actual output and the second is that 
interest rate has adjusted to keep the money market in equilibrium 
at the new level of income and output. Here it is assumed that firm 
will supply whatever output is demanded. 

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Check you progress
1. Define Macroeconomic Demand Schedule. 
 
 
 
 
 
 
 
 
 
 
9.3 LABOUR MARKET AND AGGREGATE SUPPLY