On Mon, 14 Mar 1994 06:50:38 -0800 Rudy Fichtenbaum said:
>aggregate demand and supply curves are not independent.
>This has always bothered me and no one seems to have
>solved the problem to my satisfaction.
>
>The problem is that investment is a component of aggregate
>demand but it also affects aggregate supply since
>investment is the change in the capital stock.
This is easily dealt with. See Hugh Rose's early work (IER 1966?).
In addition, there is the standard "short period" justification.
>In my opinion one of the major problems in teaching
>macro theory is that most textbook models i.e.,
>neoclassical-Keynesian models argue that anticipated
>inflation does not matter or if it does matter it is
>because it affects the demand for money. I always
>have trouble telling students with a straight face that
>if they anticipate inflation it doesn't matter.
In this setting anticipated inflation is usually expansionary
since it lowers the user cost of capital. (This focusses on
the effect on aggregate demand.) In addition, if we supplement
the AS-AD framework with some wage dynamics, expected inflation
will generally influence wage bargains. (Again, see Rose's work.)
>
>According to neoclassical-Keynesian theory inflation does
>not lower real wages. In the real world inflation is the
>major mechnanism for lowering real wages and even
>principles of economics students who don't seem to understand
>much understand this fact.
This seems wrong as stated, but perhaps I misunderstand since
there are difficulties discussing inflation in the standard
AS-AD framework. In any case, in the standard setting a demand
expansion succeeds in raising output by raising the price level
at an exogenous wage (i.e, by lowering the real wage).
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