Abstract
The slope of the aggregate supply curve of the economy in economic schools is influenced by the assumptions of the labor market. In classical economics, assuming no monetary illusion of labor, the aggregate supply curve is a vertical line at full employment. In the great crisis of the 1930s, Keynes introduced the horizontal aggregate supply to the economic world as a special state of the economy, and Keynesian economics presented the aggregate supply with a positive slope assuming the existence of monetary illusion. The monetarists with the hypothesis of adaptive expectations considers the aggregate supply in the short term with a positive slope like the Keynesians and vertical in the long term like the classics. The new classics with the assumption of rational expectations, although they consider the aggregate supply with a positive slope, but they provide the same results as the classics. Nevertheless, aggregate supply in inflationary crises as a special state of the economy has not been discussed in economic schools so far, and there is a study gap in this regard. The current research seeks to present a new theory regarding the aggregate supply of the economy in inflationary crises. The purpose of this research is to provide a new theory about the supply of the entire economy in inflationary crises, which is a basis for future research, especially for countries that are facing inflationary crises.
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Notes
In this case, the profit of the representative firm (π) becomes as follows.
$$\uppi ={\text{Py}}-{\text{WN}}={\text{Pf}}\left({\text{N}}\right)-{\text{WN}}={\text{P}}\left\{{\upbeta }_{1}{\text{N}}-\left(1/2\right){\upbeta }_{2}{{\text{N}}}^{2}\right\}-{\text{WN}}$$Then, the first order condition of the profit maximization of the price-taking firm is.
$$\frac{{\text{dP}}}{{\text{dN}}}={{\text{Pf}}}\left({\text{N}}\right)-{\text{W}}={\text{P}}\left({\upbeta }_{1}-{\upbeta }_{2}{\text{N}}\right)-{\text{W}}=0$$In this case, the second order condition is satisfied because.
$$\frac{{{\text{d}}}^{2}\uppi }{{{\text{dN}}}^{2}}=-{\text{P}}{\upbeta }_{2}<0$$
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Saadatmehr, M. Downward aggregate supply curve in inflation crisis. Evolut Inst Econ Rev 21, 21–41 (2024). https://doi.org/10.1007/s40844-024-00277-z
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DOI: https://doi.org/10.1007/s40844-024-00277-z