Criticism of AS-AD model -- Does it really work in real world?

Q1: Identify and elaborate on which part of the AS-AD model the economist is criticizing.

A:

1. The economist challenged whether the market force (SRAS) is actually adjusting itself to return to the natural output level, as deflation is unlikely to happen in the real world after World War 2.

2. The economist also cast doubt on the downward-sloping property of the AD curve.

Q2: According to the economist, which effect(s) of the downward sloping AD curve is/are likely to fail?

A:

Wealth effect and interest rate effect. He believed that the two effects are likely to be negligible when deflation happens. That means, when price level falls, the real wealth of the economy will not increase because the economy is in debt. So, deflation actually leads to disability to repay debt in nominal money and bankruptcy in the end.