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Expected Aggregate Demand, the Production Period and the Keynesian Theory of Aggregate Supply

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  • Palley, Thomas I

Abstract

This paper presents a model of Keynesian aggregate supply behavior. In the model, production takes time, which introduces a lag between the incurrence of costs and the receipt of revenues. Aggregate supply is determined by expectations of aggregate demand, and actual aggregate demand depends on actual aggregate supply. Expectations of lower future nominal wages can reduce employment because of the 'cash flow' effect, whereby lower future nominal wages cause lower future prices, thus rendering firms unable to recover costs fully. This effect represents a supply-side obstacle to using nominal wage deflation to restore full employment, and it complements traditional demand-side debt-deflation effects. Copyright 1997 by Blackwell Publishers Ltd and The Victoria University of Manchester

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Bibliographic Info

Article provided by University of Manchester in its journal The Manchester School of Economic & Social Studies.

Volume (Year): 65 (1997)
Issue (Month): 3 (June)
Pages: 295-309

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Handle: RePEc:bla:manch2:v:65:y:1997:i:3:p:295-309

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Cited by:
  1. Thomas I. Palley, 2009. "The Simple Analytics of Debt-Driven Business Cycles," Working Papers wp200, Political Economy Research Institute, University of Massachusetts at Amherst.
  2. Jochen Hartwig, 2009. "D and Z in ROPE – Will the Real Keynes Please Stand Up?," KOF Working papers 09-243, KOF Swiss Economic Institute, ETH Zurich.
  3. Jochen Hartwig, 2004. "Explaining the Aggregate Price Level with Keynes’s Principle of Effective Demand," KOF Working papers 04-95, KOF Swiss Economic Institute, ETH Zurich.
  4. Jochen Hartwig, 2004. "Keynes versus the Post Keynesians on the Principle of Effective Demand," KOF Working papers 04-88, KOF Swiss Economic Institute, ETH Zurich.

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