Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/55839 
Authors: 
Year of Publication: 
2011
Series/Report no.: 
W.E.P. - Würzburg Economic Papers No. 86
Publisher: 
University of Würzburg, Department of Economics, Würzburg
Abstract: 
It is often said that after the crisis economic textbooks have to be rewritten. However, as surveys show, almost all professors continue using the standard IS-LM/AS-AD model as the workhorse for undergraduate training. This paper shows that the IS-LM/AS-AD model is not only full of obvious inconsistencies, e.g. using two aggregate demand and two aggregate supply curves, it also presents the economy as an inherently stable system which is only destabilized by wage rigidities and policy shocks. Thus, it cannot explain involuntary unemployment and it pretends that deflation is a self-stabilizing mechanism if an economy is affected by a negative demand shock. This paper shows that it is relatively easy to reinterpret the basic model in a way that inconsistencies can be avoided and the inherent instability of macroeconomic processes which underlies the Keynesian paradigm can be demonstrated. It also allows a discussion of monetary policy in a more topical way than the traditional LM-curve.
Subjects: 
Keynesian economics
AS/AD model
economic crisis
cyclical unemployment
JEL: 
A10
A11
A22
E12
Document Type: 
Working Paper

Files in This Item:
File
Size
807.08 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.