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Supply vs. Demand

The dominant wisdom in macroeconomics has oscillated between the classical view that business cycles are caused by aggregate supply shocks and the Keynesian view that business cycles are caused by aggregate demand shocks.  This web site develops the origins of both types of models and then traces the more modern contributions. 

 

Clicking on the header graphic takes you directly to the table of contents.

  The Classical View
 
  The Keynesian View  
  Business Cycles:  Supply Shocks   Business Cycles:  Demand Shocks  
  Output is the product of capital and labor.  Concerns with the quantity of output overshadowed any concern over the possibility that output would not be consumed.
 

 

  John Maynard Keynes attributed the Great Depression to demand shocks, creating a new line of thought and pushing macroeconomics to prominence.  
  Market Clearing:  Yes   Market Clearing:  No  
  The Classical Model is based on the simplifying abstraction that markets clear.   Keynesian models are often identified with a belief in stickiness in wages and prices.
 
 
  Modeling Strategy:  Representative Agent   Modeling Strategy:  Ad Hoc  
  Given belief in market clearing, models in the classical tradition are well positioned to rely on micro foundations including sophisticated optimizing behavior.  For mathematical tractability, it is common to assume that all agents in the economy are identical.   The Keynesians, on the other hand, are prone to put forward models reasonably described as ad hoc.  This tradition has grown out of the lack (especially in the early years) of sophisticated mathematical explanations for wage and price stickiness.  The Phillips Curve is a good example of a relationship adopted on intuitive and empirical grounds rather than derived from optimizing behavior.
 
 

Comments?  Questions?  macro-at-econmodel-dot-com  Copyright 2006 William R. Parke