There are two generally accepted ways of plotting the aggregate demand (AD) and aggregate supply (AS) curves in the goods market. One puts the price level on the vertical axis (the P - y approach); the other plots the real interest rate on the vertical axis (the r - y approach). This paper develops the theoretical connections between these two approaches that permit one to tell a coherent dynamic story with the AD-AS model and also explores the conditions under which one approach or the other yields greater insight into the working of the model.

The international substitution effect provides an explanation for the downward slope of the aggregate demand curve. The textbook explanation relies on fixed exchange rates. With flexible rates, the author shows how a rise in the domestic price level can reduce net exports by an indirect effect on the current account.

This article provides a graphical method for incorporating Stanley Fischer's model of overlapping contracts into the contract-wage model of aggregate supply.

In recent years, the aggregate demand-aggregate supply model has replaced the IS-LM framework as the dominant pedagogical tool for teaching macroeconomics. Of course, the IS-LM model is still used, but its primary function has been relegated to that of providing a convenient vehicle for deriving the aggregate demand curve. In the conventional derivation, price-induced changes in the real money supply shift the LM curve along a fixed IS schedule (absent wealth effects on consumption) and map out levels of output where aggregate demand and output are equal. Implicit in this approach is the assumption that output supplied by firms responds passively to aggregate demand whatever the price level.' But this passive response necessarily implies firms raise output in response to a decrease in the price level and lower output in response to an increase in the price level-a strikingly odd result that is fundamentally inconsistent with modem theories of aggregate supply. Our argument is that, for internal consistency, the aggregate demand curve must be derived using the aggregate supply curve that will eventually be paired with the aggregate demand curve to determine equilibrium price and output. The conventional aggregate demand curve does not meet this consistency test because the Keynesian assumption which generates the aggregate demand curve (i.e., that output responds passively to demand) is at variance with the supply response that is later paired with this aggregate demand curve. The inconsistency is obvious. Firms cannot both raise and lower output in response to a change in the price level. Clearly, the conventional approach to aggregate demand neglects serious consideration of the crucial role played by aggregate supply. Since output influences consumption expenditures, the aggregate demand curve cannot be derived independently of the supply-side of the economy. Therefore, rather than use the Keynesian assumption that output responds passively to demand, we derive the aggregate demand curve by incorporating a Lucas-type supply response, which

Economic InquiryVolume 28, Issue 1 p. 185-193 ON INTEGRATING THE RICARDIAN EQUIVALENCE THEOREM AND THE IS-LM FRAMEWORK T. WINDSOR Fields, T. WINDSOR FieldsSearch for more papers by this authorWILLIAM R. Hart, WILLIAM R. Hart *Associate Professors, Miami University, oxford, Ohio. We would like to thank Robert A. Barry, Thomas E. Hall, Robert L. Moore, and two anonymous referees for helpful comments and suggestions. Any remaining errors are our own.Search for more papers by this author T. WINDSOR Fields, T. WINDSOR FieldsSearch for more papers by this authorWILLIAM R. Hart, WILLIAM R. Hart *Associate Professors, Miami University, oxford, Ohio. We would like to thank Robert A. Barry, Thomas E. Hall, Robert L. Moore, and two anonymous referees for helpful comments and suggestions. Any remaining errors are our own.Search for more papers by this author First published: January 1990 https://doi.org/10.1111/j.1465-7295.1990.tb00810.x AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Volume28, Issue1January 1990Pages 185-193 RelatedInformation

Given any decomposition of real GNP into trend and cycle components, we describe a simple statistical procedure by which the proportions of the variance of GNP growth attributable to each of these components can be calculated.

Following the inspiration of Muth [21], expectations are said to be if the (subjective) probability distribution of expected outcomes coincides with the (objective) probability distribution of actual outcomes.' In practical applications, however, it is common to employ the so-called weak-form version of this hypothesis, which defines rationality as equality between the expected outcome and the objective mathematical expectation conditional on all data available at the time the expectation is formed. Thus, expectations of inflation are said to be (weakly) rational in Muth's sense if