Blanchard's AS–AD model

In this Chapter, we present Blanchard's main tool for macroeconomics' analysis and teaching: the aggregate supply and aggregate demand (AS-AD) model. The model has been adopted by Blanchard in editions one to six of his textbook, and still constitutes the cornerstone of the mainstream treatment of macroeconomics. Its fundamentals and some of its major economic policy implications are outlined. The Chapter describes the concept of "natural equilibrium", with its pivotal role within AS-AD model and mainstream economics. The "natural equilibrium" is then linked with policy prescriptions concerning some of the main elements at the core of the debate: for example, how policymakers should react facing an economic crisis, how workers should behave in the wage bargaining process, the neutrality of money. In a nutshell, the Chapter argues the following: the AS-AD model is not keen to political pressures on the demand side and to social pressure on the side of wages. It is necessary instead that government's and unions' actions are compatible with the "natural equilibrium" level of unemployment and wage.