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The Aggregate-Supply/Aggregate-Demand Model

  • Robert J. Barro

    (Harvard University)

The aggregate-supply/ aggregate-demand (AS-AD) model is popular in textbooks, but has problems with logical consistency. In one interpretation, the Keynesian underpinnings of the AD curve-derived from the IS/LM model with downward price stickiness-conflict with the determination of the price level at the intersection of the AS and AD curves. In another view, the model corresponds to rational-expectations theories in which Keynesian properties are absent. In a third interpretation, the model is equivalent to the "complete Keynesian model," which has counterfactual implications for real wages and other variables. The main conclusion is that the AS/AD model should be abandoned.

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Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 20 (1994)
Issue (Month): 1 (Winter)
Pages: 1-6

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Handle: RePEc:eej:eeconj:v:20:y:1994:i:1:p:1-6
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