LM

LM LM

r r
IS

C IS

Y
AS

Y'

Y
AS

AS

P P

AD AD

Y'

Inf Inf
C

Un

Un

Un

Increase in Capital Expenditure by govt. in terms of infrastructure spending. Credible communication by govt. and faith of the nationals in the price control measures, which means low Price expectations and inflation remains under check. Simultaneous increase in money supply in the economy holding interest rates constant.

Y = C (Y-T) + G + I(r) -----------National Income accounts identity. By increasing the govt expenditure and money supply and holding the rate of interest and prices constant (via credible policy communication), IS and LM curve would shift to the right and output (Y) would increase from Y to Y.

Increase in Y to Y and constant prices would cause both the AS and AD curve to shift to the right to intersection point B from A. Increase in Y and constant prices would further cause reduction in Unemployment and inflation would remain constant. In the long run, due to increased productivity and labor efficiency, output Y would increase to Y at reduced price of P. Reduction in price would cause LM curve to further shift in the right to LM and intersect the IS curve at point C thus bringing down the interest rate to r. Further increase in output and reduction in interest rate and prices would cause inflation to reduce to inf and unemployment to drop further. Intersection would shift from Point A to B to C.