From Cambridge to Eternity: “Macroeconomics for the Heavens”
When macroeconomists refer to “empirical science,” they might unwittingly think of Eternity. Take the “ Cambridge Quantity equation ” M= k ∙ I (John R. Hicks, 1937) of liquidity preference ( M d for “ money demand ” in macroeconomics) for example. Then, we juxtapose for the sake of comparison the same with to the popular proposition “ The money supply M is an exogenous policy variable chosen by a central bank, such as the Federal Reserve ” ( Gregory Mankiw , Macroeconomics ); “money supply” is often denoted as M s . By definition, both demand and supply are as at a moment (T 0 in the time dimension). Let us step into the so-called “money market.” What if the market is not in “ equilibrium ,” or M s ≠ M d = k ∙ I ? Oh, that’s a peanut: The “I ” (for the “nominal” GDP) as the only “endogenous free variable” momentarily varies so as to push the money market back in equilibrium. Got that? The Truth ...