On Fri, 11 Mar 1994 [EMAIL PROTECTED] wrote:
> According to the books I've used, an increase in the
> price level, with the money supply fixed, shifts the LM curve
> leftward, resulting in a lower level of equilibrium output.
> But why would the price level increase if the money supply
> were constant. Doesn't this contradict the other proposition
> found in monst intro-to-macro textbooks that "inflation is
> always and everywhere a monetary phenomenon", since it must
> be accomodated by money creation?
There are certainly problems with the textbook AD curve (chapter
19 of Keynes's General Theory is very relevant here), but I
don't think the point you make is a knock-out blow. Most
intermediate macro texts make allowance for (a) exogenous price
shocks, such as in the oil crises of the 1970s, which may or may
not be fully acommodated by the central bank, and (b) the
acceleration of inflation in excess of money growth (for a
temporary period) when the economy is driven above potential
GNP/below the so-called natural rate of unemployment. Typically,
the downward-sloping AD curve is combined with a vertical
"long run" aggregate supply curve: wherever the AD curve happens
to be located, "long-run equilibrium" will correspond to the
point on AD where it crosses the vertical AS. In such an
"equilibrium" inflation and growth of the money stock will have
to be equal (otherwise we would be traveling up or down the
AD curve, away from "AS"), but "short-run equilibrium" (IS-LM
solved, but GNP not necessarily equal to potential) is
consistent with divergence of inflation and money growth.
Once again, I don't mean to defend the orthodoxy (which is
oarticularly questionable when it comes to the supposedly
demand-enhancing effect of a _fall_ in the price level) --
I'm just trying to set out its logic.
==========================
Allin Cottrell
Department of Economics
Wake Forest University
[EMAIL PROTECTED]
(910) 759-5762
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