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Aggregate Demand and Supply

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  • Roger E. A. Farmer

Abstract

This paper is part of a broader project that provides a microfoundation to the General Theory of J.M. Keynes. I call this project 'old Keynesian economics' to distinguish it from new-Keynesian economics, a theory that is based on the idea that to make sense of Keynes we must assume that prices are sticky. I describe a multi-good model in which I interpret the definitions of aggregate demand and supply found in the General Theory through the lens of a search theory of the labor market. I argue that Keynes' aggregate supply curve can be interpreted as the aggregate of a set of first order conditions for the optimal choice of labor and, using this interpretation, I reintroduce a diagram that was central to the textbook teaching of Keynesian economics in the immediate post-war period.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13406.

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Date of creation: Sep 2007
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Handle: RePEc:nbr:nberwo:13406

Note: EFG ME POL
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  1. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038, January.
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Cited by:
  1. Roger E.A. Farmer, 2009. "Confidence, Crashes and Animal Spirits," NBER Working Papers 14846, National Bureau of Economic Research, Inc.
  2. Marco Guerrazzi, 2011. "Search And Stochastic Dynamics In The Old Keynesian Economics: A Rationale For The Shimer Puzzle," Metroeconomica, Wiley Blackwell, vol. 62(4), pages 561-586, November.
  3. Pascal Michaillat & Emmanuel Saez, 2013. "A Model of Aggregate Demand and Unemployment," CEP Discussion Papers dp1235, Centre for Economic Performance, LSE.
  4. Farmer, Roger E. A. & Plotnikov, Dmitry, 2012. "Does Fiscal Policy Matter? Blinder And Solow Revisited," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S1), pages 149-166, April.
  5. Guerrazzi, Marco, 2010. "Expectations, employment and prices: a suggested interpretation of the new 'farmerian' economics," MPRA Paper 30832, University Library of Munich, Germany.
  6. Corrado Andini, 2009. "Teaching Keynes’s Principle of Effective Demand within the Real Wage vs. Employment Space," Forum for Social Economics, Taylor & Francis Journals, vol. 38(2-3), pages 209-228, January.
  7. Jesús Fernández-Villaverde, 2010. "The econometrics of DSGE models," SERIEs, Spanish Economic Association, vol. 1(1), pages 3-49, March.
  8. Farmer, Roger E.A., 2010. "How to reduce unemployment: A new policy proposal," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 557-572, July.
  9. Marco Guerrazzi, 2010. "How to Reduce Unemployment: Notes on Macro-Economic Stability and Dynamics," Discussion Papers 2010/106, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.

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