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Aggregate Demand

 

The Equation of Exchange

The equation of exchange, often expressed as M = k P Y or M V = P Y, plays central roles in both aggregate demand curves and demand for money.  A special page sorts out these roles for various macroeconomic theories.

The Classical View

Say's Law

The identity M V = P Y with V fixed implies that, for a fixed M, there is a downward sloping relation between Y and P

In the Classical Model, only the money supply can shift the AD curve and the money supply is fixed.  

The Keynesian View

Keynesians do a short run analysis of M V(R) = P Y, holding P fixed and deriving a relation between R and Y that is known as the LM Curve.  This is money demand. 

Letting P change then produces a relation between P and Y that is known as the aggregate demand curve.  In the latter analysis, R is changing, but is not on the diagram of Y vs. P.  The aggregate demand curve is linked to aggregate demand because the changes in R cause changes in investment.

In a Keynesian Model, IS curve shocks can move the AD curve and monetary shocks are an important source of fluctuations.

The Monetarist View

The short run monetarist view is that velocity is stable and P does not adjust so that changes in M have to translate into changes in Y.  It is not so obvious ...

References

Aggregate Demand, Wikipedia.
Veocity of Money, Wikipedia.


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Comments?  Questions?  macro-at-econmodel-dot-com  Copyright 2006 William R. Parke