Aggregate Demand and Supply-side Economics

Since the publication of the first edition of Samuelson's Principles text in 1948, introductory treatments of the short-run macroeconomic issues of inflation and unemployment have been based on the Samuelson-Cross model [Samuelson 1985, 122- 1881. This approach focuses exclusively on the role of aggregate demand, which is total spending on final goods and services, and seeks to explain inflation and unemployment in terms of cyclical fluctuations in spending alone. Specifically, unemployment results from too little spending relative to the market value of full employment output, and inflation from too much. The implication is that the economy cannot suffer from serious unemployment and inflation simultaneously, since spending cannot be both excessive and deficient. Within this tradition, stabilization policy consists entirely of demand management achieved through the application of monetary and fiscal tools.