Wednesday, December 3, 2008

I Hate Aggregate Supply / Demand

Many economists are using aggregate supply and demand models to prescribe economic cures to our recent woes. At one time I knew AS / AD well, but never liked it or really felt comfortable with it. The AS / AD model using the concept of equilibrium to model disequilibrium, in a way. Thus, I was heartened recently to see these words from Gregory Mankiw, whose textbooks from which I learned AS / AD.

As a general matter, the state of aggregate demand depends on an amorphous variable called confidence. Anything that threatens to screw up AS in the long run most likely reduces confidence and AD in the short run. The textbook separation of AD and AS is useful for focusing discussion in the undergraduate classroom, but events in the real world are rarely so clean.

Entry Here

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