Fred Foldvary wrote:
>  
>   
>> ... 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. 
>> Robert Leeson  
>>     
>
> There was historically a deflation during the latter
> 1800s.
>
> Suppose gold is money, and there is a fixed supply of
> gold per capita.  As technology advances and
> productivity  rises, with the per-capita money supply
> (MV) staying fixed, then the price level would fall,
> just as it did in the late 1800s.  A price level
> falling continuously at an annual rate of one percent
> will get cut in half in 69 years.  The per-capita
> nominal income would stay the same, but it would buy
> twice as much.
>
> This though has little to do with the AS-AD model,
> which is a hypothetical construct to show how the
> equilibrium price level is determined, since with
> lower prices the fixed money buys more stuff.
>   


Two points about this defense of the AD curve in the AS-AD model.  
First, the question is never asked, What causes the price level to 
fall?  If that question were asked, two possible answers would be 
forthcoming.  Total production (AS) increased whiles the quantity of 
money (gold or currency) remained constant, or the demand for money to 
hold increased whiles its supply remained unchanged.  In both of these 
answers, there is an implicit reference to the classical quantity theory 
of money. 

The Quantity Theory of money is the relevant theory to explain the price 
level, not what some macroeconomists now do with the AS-AD model, 
following Keynes's urging in the /General Theory/ to extend the 
microeconomic principles of supply and demand to explain prices in 
particular markets to the economy as a whole.  Thus, the continuing 
defense of the meaningfulness of the AS-AD model as an explanation of 
the price level simply amounts to defending Keynes's self-declared 
confusions over the meaningfulness of the quantity theory of money. 

James Ahiakpor