Aggregate Demand and Aggregate Supply

In Chapters 19 and 20 it was assumed that the price level was fixed so that any change in national income implied a change in only real national income. It was also assumed that real national income responded passively to changes in aggregate demand. These are major assumptions and a more modern view of the macro economy is that changes in aggregate demand might have a short term effect on real national income, but in the long term lead only to changes in the price level. This implies the existence of supply-side constraints in the economy and it is therefore no longer feasible to assume that aggregate supply simply responds passively to changes in aggregate demand. This chapter addresses these issues.