The aggregate demand curve, plotting price level against output, is said to slope down because of the wealth effect on households, the interest rate on investment, and the exchange-rate effect on exports.
Keynesians claim the interest rate effect - savings rising when prices fall - is more important than the household wealth effect because money holdings are a small part of hh wealth. But, contra Keynesians, it seems to me that what matters for household wealth is MV as a flow, not money stocks at some moment. As households buy more stuff at lower prices, the share of income going to them, hence the money flow (M times velocity), would seem to matter more than the minor amount of extra purchasing power saved. So the hh wealth effect should be greater than the added investment due to lower interest rates. If anyone thinks the Keynesians are correct, I'd be interested in the explanation of why my argument is not. Fred Foldvary ===== [EMAIL PROTECTED]
