chapter  15
AD–AS disequilibrium dynamics and endogenous growth
Pages 13

We do not enter into this discussion here, but simply avoid the situation described above by positing that a Keynesian theory of fluctuations and growth should allow for both the stock of labor and the stock of capital to be underor over-utilized. In line with Keynes (1936, p. 4) we therefore should provide an explanation of the actual employment of all available resources, not only just labor. The traditional way to start the modeling of such a situation is to assume a sluggish adjustment of the price level as well – of a form that is still to be determined – and to study on this basis the evolution of IS-LM equilibria and the price level in time. One could follow thereby the example of the macroeconometric model in Powell and Murphy (1997) by assuming that prices sluggishly adjust toward competitive conditions as encapsulated in the AS curve.