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