Aggregate demand and supply |
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Authors: | Roger E A Farmer |
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Institution: | Department of Economics, UCLA, Los Angeles, USA. Email: |
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Abstract: | This paper is part of a broader project that provides a microfoundation to the General Theory of J. M. Keynes. I call this project "old Keynesian economics" to distinguish it from new-Keynesian economics, a theory that is based on the idea that to make sense of Keynes we must assume that prices are sticky. I describe a multi-good model in which I interpret the definitions of aggregate demand and supply found in the General Theory through the lens of a search theory of the labor market. I argue that Keynes' aggregate supply curve can be interpreted as the aggregate of a set of first-order conditions for the optimal choice of labor and, using this interpretation, I reintroduce a diagram that was central to the textbook teaching of Keynesian economics in the immediate post-war period. |
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Keywords: | Keynesian economics search theory unemployment |
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