Rudy F. responded to me --
>I think you made a good point about the fact that the
>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.
>
>There are probably other problems with the theory.
I think the "positive feedback" from rising incomes TO rising money supply
often is avoided or assumed away in most of the modelling which assumes the
FED controls the money supply rather than the fact that the FED tries to "ride
herd" on a money supply that in good times grows quite rapidly as loan-making
accelerates a la Minsky. In the era of the "Euro-Currency" markets, the idea
of causation coming FROM the FEd appears a bit quaint!
>
>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.
It is true that all decision makers TRY to anticipate inflation --- but we
should remember that while the "cost of living" abstraction may play some role
in the "sense" of well being on the part of ordinary citizens and owners of
business with very little control over their prices and very little ability to
construct their own PERSONAL cost of living index --- from the point of view
of any large business attempting to peer into the future, they couldn't care
less about the AVERAGE RATE OF INFLATION --- they are focused on the expected
rate of change in the prices of THEIR inputs and THEIR products. Since that
usually involves nothing more than dressed up extrapolation we can be pretty
safe to say that anytime prices deviate from the trend of the recent past, the
result is UNANTICIPATED. BTW, I got a kick out of the current C.E.A.
attempting to plot the REAL INTEREST RATE by identifying the expected rate of
inflation as the average of the ten year blue chip inflation forecasts --
Bowles Gordon and Weiskopf used the average of the previous three year's
measured inflation -- I still think there's a lot of value in the ex post real
interest rate --- measured inflation subtracted from whatever interest rate
you're measuring.
>
>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.
>
>Rudy
Actually, this last point supports traditional AS - AD analysis. If inflation
DOES lower real wages than at higher prices there will be a higher "aggregate
supply" because business will raise outputs as profit margins stretch ---
similarly if rising inflation = lower real wages then "quantity demanded" in
aggregate will be lower because real consumption will be lower.
I don't think the data supports the idea over say a 10 - 20 year period that
higher inflation correlates with slower growth of real wages. In Europe I
believe it was actually the opposite. (but I'm willing to be immediately
proven wrong by anyone with data at their finger-tips!)
All the best ... Mike
Mike Meeropol
(bitnet%"mmeeropo@wnec")
(in%"[EMAIL PROTECTED]")
(#100)
