On an Alleged Inconsistency in Aggregate-Supply/Aggregate-Demand Analysis

Amitava Krishna Dutt

11 citations0/0 files storedRePEc: Research Papers in Economics

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Economic Theory and Policy Monetary Policy and Economic Impact Economic theories and models

Abstract

It has been argued that aggregate-supply/aggregate-demand (AS/AD) models suffer from an inconsistency because they assume that firms set price and adjust quantity for the AD curve and are profit-maximizing price takers for the AS curve. It is shown that this inconsistency is rife in intermediate macroeconomic texts. However, it is argued that the problem can be solved by appropriately reinterpreting the AD curve and the dynamics of the model. Thus while there is no need to jettison the AS/AD model as a teaching tool on grounds of internal inconsistency, there is a need to interpret it carefully.

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References

1993Macroeconomics in the Global Economy 1995The Stories We Tell: A Reconsideration of AS / AD Analysis 1990Some Pitfalls in the Conventional Treatment of Aggregate Demand 1996Keynesian Theory And The Aggregate-Supply/Aggregate-Demand Framework: A Defense

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