The Stories We Tell: A Reconsideration of AS / AD Analysis

Abstract

This paper explains that the AS/AD model as currently presented in the tests is seriously flawed. It does not fulfill the minimum requirement of a model: logical consistency. Its component parts are derived from models that reflect different, and inconsistent, models of the economy. Moreover, the appropriate disequilibrium adjustment story that appropriately accompanies it is inconsistent with observed reality. In this alternative model, Keynesian adjustment occurs through shifting AS/AD curves along institutionally determined price level vectors rather than through movements along the AS/AD curves.