----------------- HES POSTING ----------------- [Posted on behalf of Robert Leeson. -- RBE] J. Barkley Rosser, Jr wrote: "A very stupid but consistent way to bring in a downward sloping AD curve, although not of much use at the Principles level, is to assume a weak monetarist classical world in which V is constant but money neutrality does not hold. This gives an AD curve that is a rectangular hyperbola for a fixed nominal GDP, with the level of the GDP given by the money supply". An elementary question that I pose to my macro students: aren't we assuming that the real money supply is a variable that can be targeted by policy? An AD curve is conventionally derived by performing a counter-factual thought experiment: what would happen if we held the nominal money supply constant while doubling or halving the price level? But since most economists believe that there is some causal relationship between these two variables how can we expect one to move while the other remains constant? (This applies to causality running from M to P and from P to M). How can we wrench apart these two connected variables and call it an "equilibrium"? Especially in a "weak monetarist classical world". If M and P tend to move together then M/P is not a policy-controllable variable. Doesn't the AD "curve" collapse to a point or a range determined by variations in M/P? Likewise with shifts of the AD "curve". Doubling M while keeping P constant shifts the AD "curve" outwards: but what kind of equilibrium is that? Sometimes, macroeconomic models appear to be a substitute rather than a complement to rigorous thought. Robert Leeson Murdoch University ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]