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Write 10 page essay on the topic An economist asked about the AD-AS model featured in Krugman et. al.s textbook says that the model has no value in the real world, as business cycles can be better exp
Write 10 page essay on the topic An economist asked about the AD-AS model featured in Krugman et. al.s textbook says that the model has no value in the real world, as business cycles can be better explained by analysing the animal spirits driving peoples behaviour. Evaluate the sta.
While there has been a substantial quantity of theorizing and empirical work over the constituents of the aggregate demand, consumption spending has definitely been the core of or related research and debate and the history of the debate is as familiar as that of the aggregate supply wars. It started with the Keynesian consumption function which perceived consumption simply as a function of the disposable income but consequently this function encountered some experiential inconsistencies (Krugman, 2000, p. 39)
In the AS-AD model, the aggregate supply curve and the aggregate demand curve are applied together so that they can be used collectively in the analysis of the economic fluctuations. This model brings together the short-run aggregate supply curve and the aggregate demand curve which then means that the point that they cross is the point that represents the short run microeconomic equilibrium where the quantity of the aggregate output that is demanded is the same as the quantity of the aggregate output supplied (Krugman and Wells, 2006, p 256).
The aggregate supply curve is used to demonstrate the relationship that exists between the aggregate price level and the quantity of aggregate output that is supplied. Therefore the short-run aggregate supply curve is therefore employed when showing the connection that exists between the aggregate price level and the quantity of aggregate output supplied that is there in the short-run while considering the time period when many of the production costs can be taken to be constant.
In respect to macroeconomics, the short run is considered to be the period of time that is characterized by the output prices being flexible but the input prices are completely fixed or not very flexible and the short run begins after the immediate short run has ended. These assumptions that are associated with output and input prices are broad and they are therefore connected to the in the
