Procrustean Art of Backtracking: “AD Curve, the Mankiw 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 again “assumed” constant. The relationship is hyperbolic whether called the “AD curve” or the “AS 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.

             All in all, the relationship between Y and P with M* and V* shall be hyperbolic always and everywhere except for in “the short run” or in Cambridge.

 

Stories over the River. We take another story of Gregory Mankiw (Macroeconomics, Figure 10-5 on the AD curve) for example:

It is drawn for a given value of the money supply M. The aggregate demand curve slopes downward: the higher the price level P, the lower the level of real balances M/P, and therefore the lower the quantity of goods and services demanded.

Honey, you’ve got to have “sloping downward” in place of “hyperbolic”! So convenient, but where is the velocity of money (V)? Well, it is everywhere except for on the AD curve.

 

After All. There are two types of teachers, or masters (君子, jūnzǐ) in the Confucian language:

1)     The one who understands in “real” explains complex things simple.

2)     The other who understands in “nominal” explains simple things complex.  

Above all, thou shalt first get the names correct (正名, zhengming)!

             On the wayside, the rest of us sometimes as in hyperinflation get “the higher the quantity of goods and services demanded, the higher the price level P.”

Comments

Post a Comment

Popular posts from this blog

Procrustean Art of Backtracking: “Dimensions in Economics”

  The most basic dimension on earth (L 3 ) is the period of time (T) because the time duration in Here is limited for each and every creature, as opposed to in Eternity across the River (L -1 ) where the time stops lapsing (T 0 ).              The second most critical dimension in Economics is the currency unit defined by the Sovereignty as metric across the commonwealth for the value of utilities (U) of all types and kinds. The sources of utilities are not limited to the apple, the orange, the housing, taking a nap, playing with grandchildren and “leisure,” but way beyond our imagination.              Please do not account for anything in terms of mass (“M”) only, be it called “real quantity.” After all, “real” in macroeconomics may  in reality  mean “surreal,” if not “nominal.” As Adam Smith pinpoints, “It’s the consumption utility!”  ...
Read more

Velocity Wanted: A Trade-off in Eternity

    “It was many and many a year ago, In a kingdom by the sea , Those two maidens there lived whom you may know By the name of Annabel and Lee ” (sorry for the so many unauthorized variations).              Both are presupposed to live for 125 years in the kingdom; the royal economy is eternally stuck to “the natural level of output,” or g= 0 in arithmetic of Annabel and Lee. In 25 years after legitimate conception and subsequent birth, the two maidens begin to take different routes of life: the Cambridge way , viz., π= g+ m= m , vs the Princeton way , namely, π= g+ 2m= 2m . Note:   The Cambridge Quantity equation by J.R. Hicks (1937): M d = k ∙ P ∙ Y                                   The money demand by William Baumol from Princeton (1952): M d = ( b ∙ P ∙ Y / 2 i ) 1/...
Read more

Saving "the Market” out of Cambridge: “Roles of Government”

  Multiple Choices as to multiple Claims of us:             Cl. 1. There are lives in Mars.             Cl. 2. An organism can exist on the Moon.             Cl. 3. A society may be built in Death Valley.                 Cl. 4. A free market is untenable without the rule of law. We are:             Ch.1, kidding.             Ch. 2, silly.             Ch. 3, insane.             Ch. 4, sober.   No matter what we or your answers may be, there without the rule of law won’t be such a thing as liberty or freedom in the...
Read more