Theoretical Inconsistencies in the ADAS Model: Can the Model be Rehabilitated?

Abstract

The aggregate demand and aggregate supply model is the dominant pedagogical device in virtually all intermediate macroeconomic textbooks. Central to this textbook model is the conventional aggregate demand (AD) curve derived from the ISLM framework. Price-induced changes in the real money supply shift the LM curve along an unchanging IS curve (absent a real balance effect) and map out levels of output at which aggregate demand and real output are equal. The resulting AD curve is then paired with an aggregate supply (AS) curve, derived from the labour market and a production function, to determine the equilibrium price level and rate of output.¹

We would like to thank Ingo Barens, Robert Clower, David Colander, George Davis, Kirk Elwood, Richard Moody, and Michael Parkin for helpful comments on earlier drafts of this chapter. Any remaining errors are our own.