<p>Given a rigid price, <span class="math-container">$P$</span>, and a static money supply, <span class="math-container">$M$</span>, real money balances <span class="math-container">$M/P$</span> cannot adjust. As a result, people have less real money than they would require to purchase their full-employment product. This results in unemployment and shortage of income driven by lack of aggregate demand.</p>

CC BY-SA 4.0
2023-03-24T13:31:17.020Z
2023-03-24T13:31:17.020Z
Pavel Filip
<p>In this note, <a href="http://web.mit.edu/krugman/www/MINIMAC.html" rel="nofollow noreferrer">http://web.mit.edu/krugman/www/MINIMAC.html</a>, Krugman develops a simple model to introduce the idea that whenever an economy experiences price rigidity then this economy is demand-constrained. I have troubles to understand why. I know ISLM model and the basic NK DSGE model with price rigidity but I feel I miss the intuition why price rigidity implies demand constrained economies.</p>
<p>Thank you!</p>

<macroeconomics><price><aggregate-demand><multiplier>
Price rigidity and demand-constrained economies
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# Price rigidity and demand-constrained economies

(Asked by: username_0 on 2021-10-15)

In this note, <http://web.mit.edu/krugman/www/MINIMAC.html>, Krugman develops a simple model to introduce the idea that whenever an economy experiences price rigidity then this economy is demand-constrained. I have troubles to understand why. I know ISLM model and the basic NK DSGE model with price rigidity but I feel I miss the intuition why price rigidity implies demand constrained economies.

Thank you!

**Tags:** macroeconomics, price, aggregate-demand, multiplier

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## 1 answers

### Answer by username_1 on 2023-03-24. Score: 1

Given a rigid price, $P$, and a static money supply, $M$, real money balances $M/P$ cannot adjust. As a result, people have less real money than they would require to purchase their full-employment product. This results in unemployment and shortage of income driven by lack of aggregate demand.


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