« Economic Superiority | Main | My failed attempt to model longevity, retirement, and secular stagnation »


Feed You can follow this conversation by subscribing to the comment feed for this post.

It seems to me that we should think of the AD curve as being driven by two forces. Draw a curve beginning at zero, zero, then moving up in price and up in production to a peak, then falling in price and becoming closely tangent to the production line.

Demand reigns on the zero to peak side. Supply reigns on peak to ever-greater-production side.

If we assume that production has been greatly stimulated so that supply is far onto the supply side of the curve, can we reach a supply level that becomes less responsive to monetary policy?

Roger: Whoah!

Start with micro, the market for apples. There are 3 different quantities: the quantity that buyers *want* to buy (Qd); the quantity that sellers *want* to sell (Qs); and the quantity actually bought-and-sold (Q). The demand curve tells us what determines Qd; the supply curve tells us what determines Qs; and it is reasonable to assume that Q=min{Qd,Qs} (which we call "the short side rule").

I think you are talking about the short side rule, because as P rises from 0 it follows first the supply curve, then kinks where supply and demand curves cross, then follows the demand curve. And you are misusing the word "supply". It does not mean what it normally means in English. And macro is more complicated than that: first because aggregate Qd also depends on aggregate Q; and second because the "aggregate supply" curve is not really a supply curve, if you assume monopolistic competition, which most of us do.

Hmmm. Perhaps I am thinking of an 'aggregate demand curve'?

A very high price but only a few items sold results in a small market. I would say that the aggregate demand is small.

As the price falls, the number of items sold grows resulting in a larger market. I would say that the aggregate demand is larger and will approach a peak.

As the price falls still more, the number of items sold continues to increase but aggregate demand begins falling because the price-times-item number (P x I) is past the aggregate demand peak. Perhaps we would say that the item is now entering the commodity pricing range.

If we speak of monopolistic competition, and limit ourselves to that restriction, we would avoid allowing the item to become a commodity. I would think that monopoly conditions would only be good for those fortunate enough to be in the monopoly loop.

Roger: no. You seem to be describing some sort of total revenue curve. I have real output Y on the horizontal axis, not nominal output PY. But you are totally lost. And this is not the place for me to explain it to you. Time to crack open that textbook, so you can at least understand my language, and understand where I'm coming from, whether you agree or disagree with what I am saying.

Nick, a bit of history!
[Link here NR]

based on the marginal cost of production of gold and the industrial demand for gold

Not monetary demand for gold?

Accepting that discovery of new sources of gold lowers its marginal cost of production, going back onto/expanding a gold standard is deflationary. Both in theory and in practice. So, I am not sure what is so special about specifically industrial demand.

Lorenzo: good question. You are probably right. But I'm not sure it matters much if I add monetary demand. My brain won't give you a clear answer at the moment. It's been a long day.

Thanks marcus! (I just found your comment in the spam filter. Sorry about that.)

"Lorenzo: good question. You are probably right. But I'm not sure it matters much if I add monetary demand."

In the case of a product with a largely inelastic supply (like gold), I imagine that probably the monetary demand will be the main factor; it will be diferent if the commodity-money was a commoditie with a elastic supply (like cocoa seeds, as in Aztec Empire) - in these case the cost of production will probably be the more important factor

Hi Nick,

I think your point about the gold standard is correct but I'm nor sure I agree that under an inflation target things are so different.

If an inflation targeting central bank fell asleep for 70 years but the fiscal policy rule was unchanged then the long run price level should be determined by the Government budget constraint (valuation equation as Cochrane correctly calls it).

Thus, the AD curve would still slope down by exactly the same mechanism. The argument still works.

"Under the gold standard, if sellers were to offer goods at lower prices than they do, that would mean those prices would be lower relative to what prices will be in the future. Deflation would mean today's goods would be a bargain, so we would buy them now."

If we could. Wasn't one feature of the gold standard periodic or chronic insufficiency of money? As for stability, there was less stability under a gold standard than between 1940 and 1990, wasn't there?

Miguel: yes. If the stock of gold is fixed, then the elasticity of the non-monetary demand for gold relative to the unit-elastic monetary demand for gold will determine their roles in the elasticity of the AD curve. If the non-monetary demand has an elasticity greater than one, then the AD curve is more elastic than in a model with a fixed stock of money. And adding in production of new gold makes the AD curve more elastic in the long run.

I think that also answers Lorenzo's question.

Adam P: Hi! Yes, we could imagine a world in which the fiscal authority fixes the Present Value of future primary deficits to fix the flow of seigniorage revenue to fix the price level. But I don't see fiscal authorities behaving like that. Instead, they tend to spend the seigniorage revenue the central bank gives them. Plus, even if they did behave like that, nothing prevents the central bank doubling the price level by doing a 2-for-one stock split, which has no real fiscal consequences.

Min: yes. The gold standard was a "stable" equilibrium in the sense that P returned to equilibrium P*, but "unstable" in the sense that the equilibrium P* kept moving around a lot.

The comments to this entry are closed.

Search this site

  • Google

Blog powered by Typepad