Velocity Wanted: Sticky Prices yet Flexible Price Level 02
If history is any guide, there are two types
of masters:
1) Type
one: He explains simple things in as complex and complicated a way as possible.
Not to mention, he speaks a language alien to the residents innocent.
2) Type
two: She explains complex and complicated things in the simplest way possible in
vernacular friendly to most every listener.
The
Sophist. The SRAS curve (for short-run aggregate supply) is
horizontal because all prices are sticky.
The LRAS curve (for long-run AS) is
vertical because all prices are flexible.
In the medium run, some prices must be sticky while the rest flexible. Now, for
the sake of convenience, suppose the economy comprises of two products, widget
and gadget. Further on, the price of widget is fixated at 12 dollars while the
price of gadget is at the flexible P;
the natural level of output is 50
real lb with 20 lb widgets and 30 lb gadgets. Most conveniently of
all, any run may be “short” or “long,” while any level “natural” or “artificial.”
We have all the information to
propose the MRAS curve (medium-run AS): P= s∙EP+ (1– s)∙[P+ a∙(Y–
Y*)]; that is, from s= 20/ (20+30)= 0.4 to P
dollars= 0.4 x (12 dollars)+ 0.6 x [P dollars + a (dollar∙year/
lb)
x (Y- 50) (lb/ year)] in the economy (T-1) of
widgets and gadgets.
Therefore, we instantaneously (T0)
have this: P= 1.5∙a∙Y+
12- 75∙a.
With the constant coefficient conveniently set above the “zero lower bound,”
the AS curve slopes upward in the medium
run. Subject to “empirical” research, by the way, are the size (L1)
of the coefficient and the length (T1) of the run.
Got
that? Yes, Sir!
The
Simpleist.
With SRAS horizontal and LRAS vertical, we shall as a matter of semantics have
an upward sloping MRAS in between. We don’t even need to define the length (T1)
of “medium” run because it is always and everywhere between the “short” and the
“long” runs subject to the short run being no longer than the long run. Much
better than worse, we in the first place don’t even need to care about such a bizarre
term as “sticky,” however clear the term may be to Heavenly macroeconomists. Is
that clear?
Yes, of course, Ms. Doe.
Intended Consequences.
The sophists endogenous of their fortress earn Heaven-lofty fame as well as an equally
high income. Every rose has its thorns: The rest of us, as residents alien, would
never know if they be slaves of a scribbler of “the short run” and ‘the long
run”; we might also suspect their Heavenly life would be like in the Platonic Cave. Therein, one kilogram (1 kg)
of real salt and one kilogram (1 kg) of real pepper be always equal before the law of consumption utilities.
Exogenous to the fortress, the simpleist
leads a life, as John Doe or Jane Doe, no Titleist at all, no less humble than the
name and the earned income. A lining in the cloud: They are happy on Earth
believing in the dogma of Irving Fisher from New Haven: “Money is of no use to
us until it is spent” (1930, p.5). Why does anyone in the simplistic mind would
“prefer liquidity,” however fluid it may be. As slave of “Thinking at the
Margin,” Does are simply forced to
hold futile money over a fertile asset (quote to Gregory Mankiw).
If history is any guide again, the rest of us cannot and do build a theory via fusing “cross-sectional” (L-1, across space) with “longitudinal” (T-1, per period). Oh yes, we do not mean Geography as a science but do mean something similar to Alchemy as a magic.
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