Forrester,Nathan, "Macroeconomic Stabilization Policy in the Context of Inventory Dynamics", 1981
ua435
The aggregate demand-aggregate supply (AD-AS) model presented in most intermediate and advanced macroeconomic texts may provide misleading insights into the effects of economic stabilization policies. Conventional analysis of the AD-AS model shows that policies which raise demand during periods of peak unemployment and reduce demand during periods of low unemployment tend to stabilize the economy. This paper: (1) Develops a dynamic model of the AD-AS model; (2) Shows that the model produces a very long period of oscillation (approximately 50 years); (3) Shows that the conventional stabilization policies increase damping of the long cycle; (4) Adds inventories to the base model; (5) Shows that the inventories introduce a business cycle fluctuation to model behavior; (6) Shows that the conventional stabilization policies destabilize the business cycle behavior mode. This paper should help explain why standard “stabilization” policies tend to destabilize the business cycle in the System Dynamics National Model.