Summary
When they are treating the case of an economy operating at less than full employment macro theorists commonly assume that the aggregate supply function for output is perfectly elastic with respect to the price level. In this paper we demonstrate that an aggregate supply of output which is perfectly elastic at some price level cannot be derived from the interaction of the demand for and supply of labor in a competitive market even when the labor supply conditions are Keynesian in nature - e.g., rigid money wage rates.
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Holmes, J.M., Smyth, D.J. The aggregate supply of output and a constant price level. De Economist 122, 161–166 (1974). https://doi.org/10.1007/BF01680102
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DOI: https://doi.org/10.1007/BF01680102