Dear Penners,
Oh my. I started this whole brouhaha about AD but have
only now had time to read people's comments. May i ask your
forbearance to slip in one more thought on the AS-AD
controversy?
A few people suggested that properly labeling the
vertical axis as the inflation rate rather than the price
level would improve the AD-AS framework immeasurably.
Certainly the AS story begins to sound reasonable when
the issue is output vs. inflation, rather than output vs.
the price level. Why then is the price level placed on
the vertical axis rather than the inflation rate?
Let me venture a guess.
By using the price level rather than the inflation rate
on the vertical axis, textbook writers are able to concoct
an odd and unlikely -- but a logically consistent -- tale
about the AGGREGATE DEMAND curve. It is a weird stor story
about the AGGREGATE DEMAND curve. It is a weird and implausible
story, relying on assumptions of fixed money supplies and
foreign substitution affects, but it is MUCH LESS WEIRD than the
story one would need to fabricate in order to generate a negative
relationship between the inflation rate and aggregate demand for output.
In short, the price level is used because otherwise
there would be no AD curve. Without an AD curve, there would
be nothing to hang the vertical AS curve upon.
Best, Ellen Frank
