Call me “something”

The three charts below depict some alternative situations. The first illustrates the effect on real output and prices of a positive (productivity) supply shock with unchanged (constant AD) monetary policy.

The second shows the effect on real output and price of an AD shock, flowing from an expansionary monetary policy that pushes AD up, while the third chart illustrates what has been a frequently used simplifying textbook assumption, to wit, that supply is demand determined.

The next charts show the real-world counterparts. They all come from the last quarter of the 19th century when the economy was on a gold standard.

Interestingly, the last quarter of the 19th century has been dubbed the “long depression”. If so, what should we call the last 10 years, which are (about to become) the “longest expansion”?

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  1. // Reply

    What a great post. When you’re replacing horses and humans with steam engines, and introducing cast iron for the first time, you get one hell of a supply side boost! Perhaps the productive power of those early industrial technologies was simply so great that they drowned out the effects of monetary shocks in that era, delaying the learning process until the 20th century.

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