Aggregate Demand and Price Adjustment: Pigou versus Fisher

Thomas Palley

Chapter 4 in Post Keynesian Economics, 1996, pp 41-70 from Palgrave Macmillan

Abstract: Abstract Mainstream classical macroeconomics challenges Keynes’ claim to have demonstrated the possibility of equilibrium involuntary unemployment in a perfectly competitive economy with flexible prices and nominal wages. This challenge is predicated on the Pigou (1943) effect, according to which decreases in the general price level increase the real value of nominally denominated assets, thereby giving rise to a positive wealth effect on spending. It is also supported by the Keynes effect (1936), whereby decreases in the general price level increase the real money supply and lower interest rates. As a result nominal wage reduction, through its impact on product prices, can increase aggregate demand and restore full employment.

Keywords: Labor Supply; Price Level; Real Wage; Aggregate Demand; Full Employment (search for similar items in EconPapers)
Date: 1996
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-37412-6_4

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DOI: 10.1057/9780230374126_4

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