AD and AS and the New Deal

Here's our textbook author commenting on an argument made by this year's Nobel Prize winner in economics, Paul Krugman, using AD-AS analysis. Krugman assumes that in the 1930s, the AD curve was vertical, stuck at a short-rum level of output that would not change when the AS curve shifted. This is not a very strong claim, given that output was not stagnant in the 1930s, and the economy actually grew in the middle of the decade. Still, I thought that the point made in Mankiw's last paragraph was keen and worth considering in light of today's economy. Also, this exchange is a contemporary example of how economists use the AD-AS model to get a better understanding of the real world.