AS & AD shocks in the last quarter of the 19th century

In Marginal Revolution Ray Lopez puts up the following comment:

I find Sumner’s blog quite confusing, full of loaded words and assumptions. For example, here is a question for Keynesians posed by Sumner, which seems to contradict TC’s point about real and nominal statistics. Note the language in bold, which is quite controversial. Sumner apparently (it’s not clear to me) is assuming nominal GDP cannot show AS changes due to (perhaps) sticky prices? In any event, this is typical Sumner: loaded rhetorical questions, even more so than the average economist.

Sumner” When claiming that fiscal austerity reduced aggregate demand, why do Keynesians almost always provide data for RGDP growth, when NGDP growth is a much better proxy for AD? NGDP is a direct test for AD shocks, whereas RGDP can be impacted by either AD or AS. RGDP doesn’t show AD changes, it shows aggregate quantity demanded. RGDP rose in the US between 1865-96, was that more AD, or more quantity demand as supply rose?

No, Ray, it´s not confusing. Scott points you to the last part of the 19th century. If you had bothered to look, this is what you would see:

Ray Lopes

Initially, RGDP growth is all due to “more quantity demanded as supply rose”. NGDP growth is “zero” and prices fall (the “good deflation” flowing from positive productivity shocks).

Suddenly, NGDP “jumps”. That´s an AD shock. Both RGDP and prices go up.

In the middle part of the chart, NGDP growth fluctuates about “zero”. Prices stabilize before falling again. All the while RGDP rises modestly. In this period there´s a mixture of mild AS and AD shocks, sometimes pulling real output in opposite directions.

The last part of the period indicates an economy which is “demand determined”. AD (NGDP) picks up and so does RGDP. Prices stay “constant”, indicating a horizontal short run supply curve with the output level below “potential”.


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