HES: Re: DISC--Textbooks and the myth of Keynes and the classics

[Fred Foldvary]

> ... how do we
> arbitrarily hold the money supply constant and cut
> the price level in half (or double it)?  This
> question has validity now and previously. 
> Robert Leeson  

There was historically a deflation during the latter
1800s.

Suppose gold is money, and there is a fixed supply of
gold per capita.  As technology advances and
productivity  rises, with the per-capita money supply
(MV) staying fixed, then the price level would fall,
just as it did in the late 1800s.  A price level
falling continuously at an annual rate of one percent
will get cut in half in 69 years.  The per-capita
nominal income would stay the same, but it would buy
twice as much.

This though has little to do with the AS-AD model,
which is a hypothetical construct to show how the
equilibrium price level is determined, since with
lower prices the fixed money buys more stuff.

Fred Foldvary