THE AD-AS FRAMEWORK REVISITED: THEORY, POLICY, AND EMPIRICAL INSIGHTS INTO MACROECONOMIC FLUCTUATIONS

Abstract

This paper revisits the Aggregate Demand–Aggregate Supply (AD-AS) framework, a cornerstone of modern macroeconomic analysis. It explores the theoretical evolution of the model, highlighting its foundations in classical and Keynesian thought, and examines key advancements including the IS-LM model, New Keynesian perspectives, and post-LM approaches like Taylor’s rule and Romer’s interest rate-based framework. The paper also delves into empirical insights that underscore the practical relevance of the AD-AS model. Notably, studies by Michaillat and Saez (2013) illustrate the link between demand fluctuations and unemployment; Blinder and Rudd (2008) revisit supply shocks and stagflation; and Bashar (2011) provides evidence that demand shocks can have persistent long-term effects. While the model faces critiques related to oversimplification and rigid assumptions, it remains a vital tool for macroeconomic diagnosis and policy formulation. This study emphasizes the model's adaptability and underscores the importance of integrating empirical findings and policy innovations to enhance its analytical robustness in a rapidly changing global economy.

Keywords: Aggregate Demand, Aggregate Supply, IS-LM Model, New Keynesian Economics, Monetary Policy, Fiscal Policy, Stagflation, Unemployment, Demand Shocks, Macroeconomic Fluctuations