A Quantity-Constrained Macroeconomic Model with Price Flexibility

Abstract

The purpose of this paper is to argue that quantity constraints are inconsistent with flexible prices by presenting a framework in which agents are fully rational and are able to lower prices when faced with sales constraints, but where an excess supply equilibrium may be established. That is, it will be demonstrated that the quantity constraints associated with fix-price models can arise in a model where prices are flexible, even when sellers are aware of the trading possibilities they face. It is hoped that the model advanced will not only illustrate why such a result may come about, but also present one possible general framework in which to study questions of price flexibility and unemployment.