This paper examines the implications of aggregate demand elasticity for the Federal budget defici... more This paper examines the implications of aggregate demand elasticity for the Federal budget deficit when macroeconomic shocks occur. We obtain two results from the graphical analysis. First, and for an adverse change to short-run aggregate supply, the decrease in real gross domestic product and the resulting increase in the budget deficit is larger the more elastic is aggregate demand with respect to the general price level. Second, and when a negative shock to aggregate demand occurs, the decrease in real gross domestic product and the consequent increase in the budget deficit is larger the smaller is the price level elasticity of aggregate demand.
The conduct of monetary policy is an important and much debated topic in macroeconomics. In recen... more The conduct of monetary policy is an important and much debated topic in macroeconomics. In recent years, many economists have advocated targeting the level of nominal GNP as a rule for monetary policy. When this particular monetary strategy is considered within an environment of aggregate supply shocks, the price level elasticity of aggregate demand determines the direction of change of nominal GNP and, therefore, the proper direction of monetary policy. This proposition is rather easily demonstrated.
Commentary on "Does the Aggregate Demand Curve Suffer From the Fallacy of Composition," by Ira Sa... more Commentary on "Does the Aggregate Demand Curve Suffer From the Fallacy of Composition," by Ira Saltz, Pat Cantrell, and Joseph Horton, is provided.
The standard pedagogical examination of government budgets includes the distinction between cycli... more The standard pedagogical examination of government budgets includes the distinction between cyclical and structural deficits and surpluses and changes thereof. This paper extends the regular classroom analysis and graphically demonstrates that cyclical changes in the government budget can be decomposed and stated as the summation of the expenditure effect and the revenue effect.
This paper investigates the role of aggregate demand elasticity for the balance of trade when eco... more This paper investigates the role of aggregate demand elasticity for the balance of trade when economic expansion occurs. Our conclusions are two. First, when an economic expansion results from an increase of aggregate demand, the balance of trade deficit is larger the less elastic is aggregate demand with respect to the general price level. Second, when an economic expansion happens from an increase of short-run aggregate supply, the price level elasticity of aggregate demand determines both the direction of change of the balance of trade and the size of the resulting deficit or surplus. We show here that a relatively elastic aggregate demand can result in a balance of trade deficit while a relatively inelastic aggregate demand can yield a balance of trade surplus.
... Because this point is below or to the left of the NGDPT line, nominal GDP must be below its t... more ... Because this point is below or to the left of the NGDPT line, nominal GDP must be below its targeted level, and monetary poli-FIGURE 4 Nominal GDP Targeting P AS AS0 2 El Eo ADE ADI NGDP Y Fall 1995 369 Page 7. cy ...
The purchasing power parity theory of exchange rate determination predicts that countries which h... more The purchasing power parity theory of exchange rate determination predicts that countries which have a rate of inflation higher than those of other nations will experience a depreciation of their currency. This conclusion suggests that the differences in inflation rates are associated with differences in the rates of monetary growth between countries. Cassel [Money and Foreign Exchange After 1914, 1992] implies the quantity theory of money in his discussion of what has become known as the relative version of purchasing power parity. Two nations may have the same rate of monetary expansion yet different inflation rates, at least in the short run, because of inherent differences in their respective price level elasticities of aggregate demand. This note explores the significance of the price level elasticity of aggregate demand for the validity of purchasing power parity.
The conduct of monetary policy is an important and much debated topic in macroeconomics. In recen... more The conduct of monetary policy is an important and much debated topic in macroeconomics. In recent years, many economists have advocated targeting the level of nominal GNP as a rule for monetary policy. When this particular monetary strategy is considered within an environment of aggregate supply shocks, the price level elasticity of aggregate demand determines the direction of change of nominal GNP and, therefore, the proper direction of monetary policy. This proposition is rather easily demonstrated.
It is well-established in macroeconomic theory that, for a closed economy analyzed with the neocl... more It is well-established in macroeconomic theory that, for a closed economy analyzed with the neoclassical IS-LM framework where normal conditions prevail in both the commodity and money markets, the Pigou effect reinforces the Kcynes effect and causes the aggregate demand curve to be more elastic with respect to the gcncral price level. The Pigou effect, of course, results when a price-induced change in real wealth changes both consumption spending and the IS curve. While numerous economists have examined, both theoretically and empirically, the role of real wealth in the money demand function, none to our knowledge has investigated the impact of this on aggregate demand elasticity within a fiexiblc-price IS-LM system. The purpose of this note is to explore how the price level elasticity of aggregate demand is affected by the inclusion of real wealth as an argument in the money demand and LM functions.
This paper examines the implications of aggregate demand elasticity for the Federal budget defici... more This paper examines the implications of aggregate demand elasticity for the Federal budget deficit when macroeconomic shocks occur. We obtain two results from the graphical analysis. First, and for an adverse change to short-run aggregate supply, the decrease in real gross domestic product and the resulting increase in the budget deficit is larger the more elastic is aggregate demand with respect to the general price level. Second, and when a negative shock to aggregate demand occurs, the decrease in real gross domestic product and the consequent increase in the budget deficit is larger the smaller is the price level elasticity of aggregate demand.
The conduct of monetary policy is an important and much debated topic in macroeconomics. In recen... more The conduct of monetary policy is an important and much debated topic in macroeconomics. In recent years, many economists have advocated targeting the level of nominal GNP as a rule for monetary policy. When this particular monetary strategy is considered within an environment of aggregate supply shocks, the price level elasticity of aggregate demand determines the direction of change of nominal GNP and, therefore, the proper direction of monetary policy. This proposition is rather easily demonstrated.
Commentary on "Does the Aggregate Demand Curve Suffer From the Fallacy of Composition," by Ira Sa... more Commentary on "Does the Aggregate Demand Curve Suffer From the Fallacy of Composition," by Ira Saltz, Pat Cantrell, and Joseph Horton, is provided.
The standard pedagogical examination of government budgets includes the distinction between cycli... more The standard pedagogical examination of government budgets includes the distinction between cyclical and structural deficits and surpluses and changes thereof. This paper extends the regular classroom analysis and graphically demonstrates that cyclical changes in the government budget can be decomposed and stated as the summation of the expenditure effect and the revenue effect.
This paper investigates the role of aggregate demand elasticity for the balance of trade when eco... more This paper investigates the role of aggregate demand elasticity for the balance of trade when economic expansion occurs. Our conclusions are two. First, when an economic expansion results from an increase of aggregate demand, the balance of trade deficit is larger the less elastic is aggregate demand with respect to the general price level. Second, when an economic expansion happens from an increase of short-run aggregate supply, the price level elasticity of aggregate demand determines both the direction of change of the balance of trade and the size of the resulting deficit or surplus. We show here that a relatively elastic aggregate demand can result in a balance of trade deficit while a relatively inelastic aggregate demand can yield a balance of trade surplus.
... Because this point is below or to the left of the NGDPT line, nominal GDP must be below its t... more ... Because this point is below or to the left of the NGDPT line, nominal GDP must be below its targeted level, and monetary poli-FIGURE 4 Nominal GDP Targeting P AS AS0 2 El Eo ADE ADI NGDP Y Fall 1995 369 Page 7. cy ...
The purchasing power parity theory of exchange rate determination predicts that countries which h... more The purchasing power parity theory of exchange rate determination predicts that countries which have a rate of inflation higher than those of other nations will experience a depreciation of their currency. This conclusion suggests that the differences in inflation rates are associated with differences in the rates of monetary growth between countries. Cassel [Money and Foreign Exchange After 1914, 1992] implies the quantity theory of money in his discussion of what has become known as the relative version of purchasing power parity. Two nations may have the same rate of monetary expansion yet different inflation rates, at least in the short run, because of inherent differences in their respective price level elasticities of aggregate demand. This note explores the significance of the price level elasticity of aggregate demand for the validity of purchasing power parity.
The conduct of monetary policy is an important and much debated topic in macroeconomics. In recen... more The conduct of monetary policy is an important and much debated topic in macroeconomics. In recent years, many economists have advocated targeting the level of nominal GNP as a rule for monetary policy. When this particular monetary strategy is considered within an environment of aggregate supply shocks, the price level elasticity of aggregate demand determines the direction of change of nominal GNP and, therefore, the proper direction of monetary policy. This proposition is rather easily demonstrated.
It is well-established in macroeconomic theory that, for a closed economy analyzed with the neocl... more It is well-established in macroeconomic theory that, for a closed economy analyzed with the neoclassical IS-LM framework where normal conditions prevail in both the commodity and money markets, the Pigou effect reinforces the Kcynes effect and causes the aggregate demand curve to be more elastic with respect to the gcncral price level. The Pigou effect, of course, results when a price-induced change in real wealth changes both consumption spending and the IS curve. While numerous economists have examined, both theoretically and empirically, the role of real wealth in the money demand function, none to our knowledge has investigated the impact of this on aggregate demand elasticity within a fiexiblc-price IS-LM system. The purpose of this note is to explore how the price level elasticity of aggregate demand is affected by the inclusion of real wealth as an argument in the money demand and LM functions.
Uploads
Papers by Gary Maggs