Making sense of the aggregate demand-supply model

The central purpose of the paper is to highlight the logical inconsistency of the traditional Aggregate Demand-Aggregate Supply model, and to the so-called Keynesian comparative static results derived from it, which leads to inconsistent results when applied to out of equilibrium situations. The reason, the authors argue, is that in partial-equilibrium analysis households are distantly considered from firms, so that in aggregate demand-supply analysis such separation becomes untenable because firms are not only producers but providers of employment to households as well. The paper offers a further insight in the sequential dynamics of the General Theory, which lies behind this circularity of the income-expenditure flow and restates some of Kalecki’s and Keynes assertions after discussing two probable routes to solve this perceived inconsistency.