The Simple Analytics of Aggregate Demand Price and Aggregate Supply Price Analysis

Abstract

Imagine a circumstance - a fantasy - in which novice economics students were brought up with Keynes’s aggregate demand and supply price framework. They would be taught that entrepreneurial production and, hence , employment decisions are made under the weight of a shroud of impenetrable uncertainty. They need not have been puzzled by the phenomenon of stagflation. They would not have been troubled by evidence of procyclical movements in real wages. They could argue with students exposed to conventional texts that the stickiness of nominal wages is peripheral to the substantive explanation for the occurrence of less than full employment output. Instead, they could contend that a fall in the nominal wage need not raise the level of employment. They would have absorbed, implicitly, a Marshallian approach to microeconomics - through Keynes’s iconoclastic filter - without troubling themselves with the incompatible and inconsistent mixture of topics that infest introductory textbooks