Editing Pigou effect (section)

== Integration with Keynesian aggregate demand ==
Keynes argued with that a drop in [[aggregate demand]] could lower both employment and the price level in unison, an occurrence observed in the [[deflation]]ary [[Great Depression|depression]]. In the [[IS-LM]] framework of [[Keynesian economics]] as formalised by [[John Hicks]], a negative aggregate demand shock would shift the IS curve left; as a result, a simultaneously falling wage and price level would shift the LM curve downward due to a rising real money supply - this is referred to as the [[Keynes effect]]. The Pigou effect would in turn counter the fall in aggregate demand, through rising current real balances raising expenditures via the [[Income effect]], thus shifting the IS curve back towards the right.