Reading Guide 7

Textbook Reading Guide – Unit 7 AD-AS Model

Jim’s comments:  

This is a critical Unit and chapter. After spending quite a bit of time in the past few units looking at how to measure the economy and whether or not the economy is achieving our major goals, it’s now time to look at the two major theories, classical/neoclassical and Keynesian, and the policy recommendations they espouse for managing the economy.

Chapter 11 presents the AD-AS model, or as I prefer to think of it, the AD-SRAS-LRAS model.  This analytical model is the foundation for understanding how these two theories view the economy. Understanding this model now will greatly help in the next few units when we examine the two theories closer.

Read the entire chapter and pay particular attention to the Introduction and sections 11.1 through 11.5.  Pay very close attention. Read and study the “side boxes” too, such as the one labeled “Clear It Up” in section 11.2.

A final comment: The neoclassical/classical theory and the Keynesian theory are pretty much fundamentally at odds with each other.  This book tends to try to bridge that gap between the two theories by saying “Keynesian theory is a short-run” thing and “neoclassical describes the long-run”.  This is a compromise I don’t agree with. There is fundamentally no empirical or institutional evidence that Say’s law holds true or that the economy truly functions in a neoclassical fashion, even in the long-run.  However, very large numbers of economists, some for ideological reasons and some for methodological reasons, continue to espouse the neoclassical theory.  Thus, I present the neoclassical theory in this course.

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Table of Contents from Principles of Macroeconomics, 2e