Aggregate Supply

Keynesian economics was often criticized for not taking the "supply side" of the aggregate economy into account. This criticism seems well justified, and what we now know about aggregate supply has mostly come from committed opponents of Keynesian economics, the "New Classical Economists." However, up-to-date Keynesians have adopted a large part of it, and from their point of view, the accepted theory of Aggregate Supply supplements Keynesian thinking, rather than opposing it. That, of course, is not the way the New Classical Economists see the matter. We'll leave that disagreement for the last chapter on "Controversies in Macroeconomics," and in this chapter we will try to present a neutral version of the new theory of Aggregate Supply -- one that does not prejudge its compatibility with Keynesian economics.

The Problem of Inflation