June 01, 2004
Keynesian Aggregate Supply
The Keynesian's needed an aggregate supply curve plus they needed to address address the issues raised by persistent unemployment.
Recall the classical view:
Suppose we reorganize this diagram by putting the wage rate on the vertical axis and incorporating the price level into the demand for labor.
If the nominal wage rate is somehow fixed and the demand for labor is to the right, we can get labor hired determined entirely by demand.
The following diagram is an attempt to explain how we could get into this disequilibrium if the price level falls, the wage rate does not, and workers' labor supply is based on the old price level.
Is the version from the book clearer?
We can also get an upward sloping AS curve if labor supply is based on sluggish price expectations.
The rational expectations theory says that workers are not that naive. If their price expectations are "rational", we can be right back to the classical outcome.
