I CONTINUE TO BE MYSTIFIED BY WHY ROBERT LEESON FINDS THE AGGREGATE DEMAND CURVE ILLEGITIMATE. IN STANDARD TEXTBOOK PRESENTATIONS, THE AGGREGATE DEMAND CURVE IS SIMPLY THE TRANSLATION OF THE IS/LM MODEL INTO P-Y SPACE. FORGET THE GRAPHICAL CURVES FOR THE MOMENT. IF I SOLVE THE IS/LM EQUATIONS TO ELIMINATE INTEREST RATES, I AM LEFT WITH A REDUCED FORM IN P AND Y -- AN AGGREGATE DEMAND EQUATION. THE AD CURVE IS JUST THE GRAPH OF THAT EQUATION. Robert Leeson <[log in to unmask]> writes: "[That in contrast to the AD curve] Every p-q combination along a[n] [ordinary microeconomic demand curve] has (a) a respectable theoretical underpining (utility maximisation)." IF THIS MEANS THAT WE CAN GENERICALLY DERIVE SUCH DEMAND CURVES FROM UTILITY MAXIMIZATION PROBLEMS, THEN SURE. BUT THAT IS REALLY ANOTHER ISSUE. WE COULD CONSTRUCT DEMAND CURVES HYPOTHETICALLY (OR EVEN EMPIRICALLY) OFFERING AGENTS PRICE SCHEDULES AND ASKING THEM HOW MUCH THEY WOULD DEMAND. ONE MIGHT IMAGINE THAT THEY ARE MAXIMIZING UTILITY BEHIND THEIR CHOICES OR, TO PUT IT DIFFERENTLY, ONE MIGHT CONJECTURE A THEORY OF THEIR BEHAVIOR THAT RESTS ON UTILITY MAXIMIZATION, AND THAT THEORY MIGHT -- DEPENDING ON YOUR METHODOLOGICAL VIEWS -- GIVE YOU SOME COMFORT OR REASSURANCE ABOUT THE ROBUSTNESS OF YOUR DEMAND CURVE, BUT THERE IS NONETHELESS NO DIRECT APPEAL TO UTILITY MAXIMIZATION IN CONSTRUCTING DEMAND CURVES IN THIS MANNER. AND OF COURSE, HISTORICALLY, DEMAND CURVES THEMSELVES PREDATE THE UTILITY MAXIMIZATION CONSTRUCTION. ON A SIMILAR BASIS THE AGGREGATE DEMAND CURVE CAN BE GIVEN "RESPECTABLE THEORETICAL UNDERPINNINGS." THE AD CURVE IS A REDUCED FORM OF THE IS/LM EQUATIONS. THESE ARE IN TURN REDUCED FORMS OF MORE BASIC EQUATIONS: IS OF THE CONSUMPTION AND INVESTMENT FUNCTIONS; LM OF THE MONEY SUPPLY AND MONEY DEMAND FUNCTIONS. AND EACH OF THESE FUNCTIONS HAS BEEN GIVEN UNDERPINNINGS IN STANDARD MICROECONOMIC OPTIMIZATION PROBLEMS. AGGREGATION, OF COURSE, RAISES ITS OWN DIFFICULT ISSUES. HICKS WAS WELL AWARE OF THIS WHEN HE CREATED THE IS/LM MODEL. BUT SADLY, THE ADVOCATES OF REPRESENTATIVE-AGENT MICROFOUNDATIONS SEEM TO HAVE FORGOTTEN THIS POINT. Robert Leeson goes on: "and (b) corresponds to an observable or at least plausible set of relative prices. It is worthwhile asking what the demand for good y would be if the price of good y doubled (or was cut in half), ceteris paribus. We are not generally interested in implausible values of p. "But what is the theoretical underpinning for the thought experiment of keeping M constant and doubling (or cutting in half) P? Are these potentially observable or feasible outcomes?" IT IS A PROPERTY OF ANY MODEL IN WHICH THERE ARE ENDOGENOUS AND EXOGENOUS VARIABLES THAT WE DO NOT BELIEVE THAT THE ENDOGENOUS VARIABLES (EITHER THE PRICE OF AN INDIVIDUAL GOOD (p) OR THE GENERAL PRICE LEVEL (P) CAN BE CHANGED WITHOUT CHANGING THE EXOGENOUS VARIABLES. STILL, TO UNDERSTAND THE INNER WORKINGS OF THE MODEL, WE ASK CONTRARY-TO-FACT HYPOTHETICAL QUESTIONS. TYPICALLY, THE CURVES THAT WE PLOT ARE THE ANSWERS TO THOSE QUESTIONS. THIS IS JUST AS TRUE FOR MICROECONOMIC SUPPLY AND DEMAND, WHERE WE PLOT THE DEMAND CURVE, WITHOUT ASKING HOW IT HAPPENS THAT THE PRICE CHANGES. THIS MAY IMPLY THAT THAT THERE ARE SOME POINTS ON OUR CURVE THAT NO COMBINATION OF EXOGENOUS-VARIABLE SETTINGS COULD EVER GET US TO. BUT SO WHAT? SUCH POINTS WILL NOT BE MISLEADING, BECAUSE THEY WILL NEVER BE SELECTED AS PART OF THE MODEL'S SOLUTION. THIS IS NO DIFFERENT WITH THE AGGREGATE DEMAND CURVE. Robert Leeson continues: "Also, if P was arbitrarily cut in half or doubled (M held constant), what would happen to AS?" IN GENERAL, NOTHING. THE POINT OF SEPARATING SUPPLY AND DEMAND FOR MICROECONOMIC OR MACROECONOMIC CASES IS TO TO ISOLATE THE FACTORS THAT MATTER FOR ENDOGENOUS VARIABLES INTO DISTINCT SETS. SOMETIMES, AS FRIEDMAN POINTS OUT IN HIS FAMOUS METHODOLOGY ESSAY, THIS IS AN EFFECTIVE STRATEGY (E.G., THE MARKET FOR APPLES), AND SOMETIMES IT MIGHT NOT BE (E.G., MARKETS FOR SOME FINANCIAL ASSETS). BUT THE MODELS ARE CONSTRUCTED ON THE BASIS OF ASSUMING THAT SUCH ISOLATION IS EFFECTIVE IN A PARTICULAR CASES. Kevin Hoover