(DP 1997-03) A Keynesian Model of Aggregate Demand and Supply

Abstract

This paper defines an aggregate demand function based on portfolio balance with three assets (money, bond and equities) and an aggregate supply function derived from 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 povides explanations of Phillips curve, stagflation and procyclical real wage phenomena. It also allows a continuum of full-employment equilibria.