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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

Suggested Citation

  • Palley, Thomas I, 1997. "Expected Aggregate Demand, the Production Period and the Keynesian Theory of Aggregate Supply," The Manchester School of Economic & Social Studies, University of Manchester, vol. 65(3), pages 295-309, June.
  • Handle: RePEc:bla:manch2:v:65:y:1997:i:3:p:295-309
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    Cited by:

    1. Jochen Hartwig, 2006. "Explaining the aggregate price level with Keynes's principle of effective demand," Review of Social Economy, Taylor & Francis Journals, vol. 64(4), pages 469-492.
    2. Jochen Hartwig, 2017. "The Comparative Statics of Effective Demand," Review of Political Economy, Taylor & Francis Journals, vol. 29(3), pages 360-375, July.
    3. Christian Schoder, 2015. "Methodological, internal and ontological inconsistencies in the conventional micro-foundation of post-Keynesian theory," Working Papers 1518, New School for Social Research, Department of Economics.
    4. Thomas I. Palley, 2009. "The Simple Analytics of Debt-Driven Business Cycles," Working Papers wp200, Political Economy Research Institute, University of Massachusetts at Amherst.
    5. Jochen Hartwig, 2009. "D and Z in ROPE," KOF Working papers 09-243, KOF Swiss Economic Institute, ETH Zurich.
    6. 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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