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When the intersection of aggregate demand and aggregate supply occurs in the Keynesian horizontal range a recession and excessive unemployment are present: the recommended policy would be to stimulate aggregate demand. When the intersection is in the classical vertical range, inflation is present: the recommended policy would be to contract aggregate demand.
Figure 7.2 Policy choice
| Throughout the 1960's and the 1970's, the emphasis of the American administration has been to stimulate aggregate demand in order to control unemployment. Control of inflation was accomplished with the help of tax changes or controls over prices and wages. |
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