Robert Leeson wrote:
> ----------------- HES POSTING -----------------
> Barkley Rosser's observation misses the point.  Whether the correlation between changes in money and changes in aggregate prices is very high (previously) or lower (currently), how do we arbitrarily hold the money supply constant and cut the price level in half (or double it)?  This question has validity now and previously. 
>


I don't quite see the problem.  Whenever, we construct the curves that 
feed into models with well defined equilibria, we do it conjecturally.  
The demand curve is, for example, the locus of quantities that people 
would buy, ceteris paribus, as the price changes.  (Of course, what goes 
into the pound of ceteris paribus determines, for example, whether we 
have compensated or uncompensated demands and dictates in part how we 
must use the curves in the model.)  In the world of the model, we cannot 
generally arbitrarily change the price, which means that off-equilibrium 
prices can be observed only if there are offsetting deviations from 
equilibrium elsewhere in the model -- and frequently, people manipulate 
models under methodological restriction that off-equilibrium 
observations are not to be entertained.

 The case with the aggregate-demand curve is no different.  In the 
standard textbook case, it is derived by asking what would happen to 
demand (e.g., in an IS/LM model, though it could be in a quantity-theory 
model just as easily) as prices vary ceteris paribus.  The induced 
shifts of the LM curve along the IS curve trace out levels of demand 
that correspond to each price.  Under a full equilibrium interpretation, 
the only observed points are points at which the aggregate supply and 
demand curves cross (and the IS/LM curves also cross at the same price 
quantity combination) and none of the conjectural off-equilibrium points 
are observed.  In reality, we cannot change prices without changing the 
stock of money (or some other exogenous variable), but the curve that we 
constructed is not meaningless, because the conjectural points become 
operative as money or other exogenous variables change.  Again, this 
seems to me to be the absolutely standard way in which we construct a 
variety of curves in economics.

Kevin Hoover