(DP 1996-02) Aggregate Demand and Supply Reconsidered

Jose Encarnacion, Jr.


These paper defines an aggregate demand function based on portfolio balance with three assets (money, bonds and equities) and an aggregate supply function based on the supply behavior of a representative price-setting firm. The money wage is endogenous but the usual result is a short-period unemployment equilibrium. The model provides explanations of Phillips curve, stagflation and procyclical real wage phenomena. It also allows for the possibility of a continuum of full-employment equilibria.

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