Fred Foldvary writes: The AD-AS model "has pedagogic value for understanding
the relationships among the money supply, output, and the price level, along
with the effects of demand-side and supply-side policies ... The aggregate
demand is most simply the total demand for goods (y) given some supply of
money, as a function of the price level. Given some fixed MV (money times
velocity), lower price levels increase the purchasing power of money and thus
the aggregate quantity demanded of goods is greater. Hence the downward
sloping AD."
But since we also teach students that there is an empirical relationship (some
between of a causal kind, reverse or otherwise) between the supply of money and
prices, how can we legitimately hold the money supply constant and pick - out of
thin air - abstract gravity defying values of the price level (to derive an AD
curve)?
Robert Leeson