On an Alleged Inconsistency in Aggregate-Supply/Aggregate-Demand Analysis
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.
Volume (Year): 23 (1997)
Issue (Month): 4 (Fall)
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