EXPECTED AGGREGATE DEMAND, THE PRODUCTION PERIOD AND THE KEYNESIAN THEORY OF AGGREGATE SUPPLY

This paper presents a model of Keynesian aggregate supply behaviour. I n the model production takes time, which introduces a lag between the incurrence of costs and the receipt of revenues. Aggregate supply is d etermined by expectations of aggregate demand, and actual aggregate de mand depends on actual aggregate supply. Expectations of lower future nominal wages can reduce employment because of the ''cash flow'' effec t, whereby lower future nominal wages cause lower future prices, thus rendering firms unable to recover costs fully. This effect represents a supply-side obstacle to using nominal wage deflation to restore full employment, and it complements traditional demand-side debt-deflation effects.