Aggregate supply = C + S + T + RF = Aggregate income generated in the economy

(i) Consumption Demand
(ii) Investment Demand
(iii) Government Expenditure
(iv) Net Export (Export - Import)

Cyclical Unemployment:
(i) This unemployment exists during the downturn phase of trade cycle in the economy.
(ii) In a business cycle during the period of recession and depression, income and output fall leading to widespread unemployment.

(i) Aggregate (desired) consumption expenditure (C)
(ii) Aggregate (desired) private savings (S)
(iii) Net tax payments (T)
(iv) Personal (desired) transfer payments to the foreigners (Rf)
AS = C + S + T + Rf

1. No single buyer or seller can affect the price.
2. Full employment
3. People are motivated by self interest Market forces determine everything right.
4. Perfect competition exists in labour and product market.
5. There is wage price flexibility.
6. Money acts as medium of exchange.
7. Long run analysis.
8. No overproduction or unemployment.

The aggregate demand is the amount of money which entrepreneurs expect to get by selling the output produced by the number of labourers employed. Therefore, it is the expected income or revenue from the sale of output at different levels of employment.
Aggregate demand has the following four components:
(i) Consumption demand
(ii) Investment demand
(iii) Government expenditure and
(iv) Net Export (export - import)

(i) Effective demand denotes money actually spent by the people on products of industry.
(ii) The money which entrepreneurs receive is paid in the form of rent, wages, interest and profit.
(iii) Therefore effective demand equals national income.
(iv) An increase in the aggregate effective demand would increase the level of employment. A decline in total effective demand would lead to unemployment. Therefore,
(v) Thus the total employment of a country can be determined with the help of total demand of a country.

(i) The classical theory of employment is composed of different views of classical economists on the issue of income and employment in the economy.
(ii) Classical economists assumed that the economy operates as the live of full employment without inflation in the long period.
(iii) They also assumed that wages and prices of goods were flexible and the competitive market existed in the economy.

S. No:	Keynesianism	Classicism
1.	Short-run equilibrium	Long-run equilibrium
2.	Saving is a vice	Saving is a social virtue.
3.	Money functions as medium of exchange and store of value	Money acts as a medium of exchange
4.	Macro approach to national problems	Micro approach to macro problems
5.	State intervention is advocated	Favoured laissez-faire policy

(i) Aggregate supply refers to the value of total output of goods and services produced in an economy in a year ie national product or income.
(ii) The components of aggregate supply are:
(iii) Aggregate (desired) consumption expenditure (C)
(iv) Aggregate (desired) private savings (S)
(v) Net tax payments (T)
(vi) Personal (desired) transfer payments to the foreigners (Rf)
AS = C + S + T + Rf
In this figure 2 aggregate supply curves are drawn for the assumption of fixed money wages and variable wages.

Explanation
(i) Z Curve is linear (fixed money wages)
(ii) Z₁ curve is non-linear (wage rate increases with employment)
(iii) When full employment level of Nf is reached output cannot be increased by employing more men.
(iv) So aggregate supply curve becomes inelastic (Vertical straight line).
(v) In reality aggregate supply curve will be like Z₁ .
(vi) If prices are high and wages low, the producers will employ more labourers.
(vii) 4YAggregate supply is an important factor in determining the level of economic activity.

i. The classical economists always believed in the existence of full employment in the economy.
ii. To them full employment was a normal situation and any deviation from this was regarded as something abnormal.
iii. According to Pigou, the greatest exponent of the classical view, the tendency of the economic system was to automatically provide full employment in the labour market.
iv. Full employment exists “when everybody who at the running rate of wages wishes to be employed”.
v. Those who are not prepared to work at the existing wage rate are not unemployed in the Pigovian sense because they are voluntarily unemployed.
vi. There is, however, no possibility of involuntary unemployment in the sense that people are prepared to work but they do not find work

S.No Keynesian Classicism 1. Short-run equilibrium Long-run equilibrium 2. Savings is a vice Saving is a social virtue 3. Money functions as medium of exchange and store of value. Money acts as a medium of exchange. 4. Macro approch to national problems. Micro foundation to macro problems. 5. State intervention is advocated. Favoured laissez-fair policy. 6. Applicable to all situations-full employment and less than full employment. Applicable only to the full employment 7. Captialism has inherent contradictions Captialism is good. 8. Budgeting should be adjusted to the requirements of economy. Balanced budget is favored. 9. Equality between saving and investment is achieved through changes in income Equality between saving and investment is achieved through changes of rate of interest 10. Rate of interest is determined by the demand for and supply of money Rate of interest is determined by saving and investment. 11. Rate of interest is a flow. Rate of interest is a stock. 12. Demand vreates its own supply. Supply creates its own demand. 13. Rate of interest is a reward for parting with liquidity Rate of interest is a reward for savings.