>From Victor
>DATE: Fri, 11 Mar 1994 15:03:57 -0500 (EST)
>FROM: Doug Henwood <[EMAIL PROTECTED]>
>
>For one thing, inflation is not always and everywhere a monetary
>phenomenon, as Uncle Miltie once put it. Inflation collapsed in Britain in
>the early 1980s despite rapid money growth; the experience in the US was
>similar, though the numbers were less dramatic. Lots of the credit growth
>captured by the monetary aggregates went into financial and real estate
>markets rather than goods. You can call those bull markets inflation, but
>I don't think most mainstreamers would accept the label.
>
>Doug
>
>Doug Henwood [[EMAIL PROTECTED]]
>Left Business Observer
>212-874-4020 (voice)
>212-874-3137 (fax)
>
>On Fri, 11 Mar 1994 [EMAIL PROTECTED] wrote:
>
>> Dear Penners --
>>
>> Is there anybody out there who can explain to me
>> the logic of the aggregate demand curve, found in
>> intro and intermediate macro texts?
>>
>> 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?
>>
>> Is this AD curve as nonsensical as it sounds, or
>> am I just missing something?
>>
>> Best, Ellen Frank
>>
>From Victor Kasper
The LM curve as I recall is measured with the real interest rate on the
vertical axis and real output on the horizontal axis. The LM curve
can be shifted by changes in the real money supply (M/P). If P
increases the value of M/P declines so the LM curve shifts leftward and
up. This is the framework as presented by Robert Gordon. If we assume
am upward sloping short run AS curve or a veritical upward short run or
long run AS curve any change in the AD curve by a change in aggregate
expenditures. Thus and increase in AD in this framework causes an
increase in the price level, ceteris paribus. The increase in the price
level given the nominal money supply cause the real money supply to
decrease. There are a variety of theories for this involving people
altering their wealth portfolios as a result of how the rise in P has
changed them. Keynes focused on financial portfolios. Pigou included
real wealth in these considerations. The net result is a rise in
prices. It is a one time rise in prices. It ends after adjustment.
For rising prices to become inflation the argument goes that they must
be sustained over time or built into expectations. If the FED holds the
nominal money supply constant the price rise will end, ceteris paribus.
The initial increase in AD in this framework will push real output past
potential output in the short run. The price adjust that takes place
will move output back to potential output. If the FED attempts to stop
this by increasing the money supply the AD curve will shift left again
resulting in upward price pressure. If the population comes to continue
to expect the FED to accomodate government policy which may have been
the inital cause of the change in AD, the population and businesses will
adopt inflationary expectations. The usual distincton here is that a
one time rise in prices causing the LM curve to shift upward is not
inflation in the sense that is sustained by inflationary expectations.
Inflation is defined by some to be a sustained rate of increase in the
price level. Which begs the question, how long does it have to be
sustained to be called inflation? I asked Robert Gordon. I seem to
recall his anwser being that when price level increases becomes
correlated with its past values. This would in this framework represent
empircal evidence of inflation. There are several
neoclassical-Keynesian synthesis abstract models that also incorporate
this view of inflation.
>>
>
