Procrustean Art of Backtracking: “AD Curve, the Bernanke Style”

 

Opening any textbook, we come across the AS-AD model. The framework has the price level (P) on the ordinate (the y axis) and the real GDP (Y= YN/ P, where YN supposedly for this year’s nominal GDP) on the abscissa (the axis of x).

             First of all, there is a great technical problem that the abscissa (YN/ P) is defined to be a function of ordinate (P). Most macroeconomists, not to mention the rest of us, would have difficulty traveling in such an unusual coordinate system.

             Second of all, with the stock of money (M) and the velocity of money (V) assumed to be constant in the model as usual “for the sake of convenience,” the rest of us would have a couldn’t-be-simpler equation P∙Y≡ M∙V= k with k assumed constant. The relationship is hyperbolic whether called the “AS curve” or the “AD curve.” That’s from the Three R’s.

             As well known, the Quantity equation P∙Y≡ M∙V is conceived to define the velocity of money (V). The equation is true by definition. The relationship between Y and P shall be hyperbolic always and everywhere except for in “the short run” or in Cambridge.

 

Stories across the River. We take a story of Ben Bernanke et al. (Macroeconomics, §9.6 on AD and AS) for example.

1)     They split Y into AS and AD as if the two could be different. Again, AD≡ AS, as long as Y represents GDP in the year, real or nominal, if not virtual or imaginary.

2)     They go back to the IS-LM model, never minding which is presupposed to be independent from the AS-AD model. To paraphrase, the price level (P) is parametric in the former while the interest rate (r) is parametric in the latter. The two models are incompatible by their own assumptions.

              Again, a parameter is not a variable, be it called “exogenous variable.” To be realistic, a parameter represents a different occasion, for instance, a different year in a different scenario.

3)     Undeterred, they continuously vary the price level in the IS-LM model for the sake of deriving the AD curve.

              To be correct, the AD “spot” makes a shift once a year. In their so-claimed “AS-AD model,” accordingly, all different accounting years are collapsed into one.

4)     If they will, they could equally legitimately derive the AS curve from IS-LM as well.

5)     Furthermore if they will, they could derive the whole IS-LM model from the AS-AD.

 

Never Mind, at any rate. The time dimension is irrelevant in Eternity. Anyone can freely mix together moments, hours, years, decades, millimeters, miles, light-years and anything else of convenient choice. In the first place, a “thing” therein can be a “one” and vice versa.

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