Gary E. Maggs

On the Keynes and Pigou effects in aggregate demand theory

Abstract The standard approach to the derivation of aggregate demand employs the IS-LM model with a flexible price level in which distinctions are drawn between the Keynes and Pigou effects. This paper is an extension of this traditional analysis and demonstrates that the slope of the economys aggregate demand function may be dichotomized and specified as the summation of these two effects. This result is then used to examine the impact of different conditions within the product and money markets. An expression for the price level elasticity of aggregate demand is also derived.

Monetary Policy Rules, Supply Shocks, and the Price-Level Elasticity of Aggregate Demand: A Graphical Examination.

The manner in which the price-level elasticity of aggregate demand affects alternative monetary policy rules designed to cope with random aggregate supply shocks is demonstrated in the two-dimension price and output graphs found in macroeconomics textbooks.

A Macroeconomic Approach to Teaching Supply-Side Economics.

A graphical approach shows that in order for the tax revenue to increase, following a reduction in the marginal rate, the increase of aggregate supply must be greater the lower the price level elasticity of aggregate demand.

Supply-Side Economics and the Price Level Elasticity of Aggregate Demand:

A concept that has been largely ignored in the economic literature is the price level elasticity of aggregate demand. The purpose of this article is to integrate this concept into supply-side economic theory and demonstrate the conditions under which decreased tax rates induce higher tax revenues. Within a standard aggregate demand, aggregate supply reduced form model, it is found that the relationship between tax rates and tax revenues depends on two factors: the tax rate elasticity of aggregate supply and the price level elasticity of aggregate demand. More specifically, it is found that a tax decrease that increases the aggregate supply of goods and services is more likely to also increase tax revenue when the price level elasticity of aggregate demand is greater. Alternatively, for a tax rate decrease to increase tax revenue, the tax rate elasticity of aggregate supply must be greater when the price level elasticity of aggregate demand is lower.

Economic Expansion and The Balance of Trade: The Role of Aggregate Demand Elasticity

This paper investigates the role of aggregate demand elasticity for the balance of trade when economic expansion occurs. We have two conclusions. 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.

A NOTE ON GOVERNMENT BUDGETS

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.

Depository disintermediation and the equilibrium quantity of money market mutual funds

Abstract This study investigates the relationship between market interest rates and the number of money market mutual funds offered from 1971/IV to 1984/IV. The quantity of MMMFs was influenced by the growing gap between market rates and highly regulated explicit rates on commercial bank liquid deposits during this period. A reduced form of the equilibrium quantity of MMMFs is estimated for two theories. One is a peak-rate specification to test whether a sufficiently high interest rate triggers a greater number of MMMFs. The second specification tests whether the number of MMMFs is influenced by a spectrum of market interest rates, as suggested by a distributed-lag scheme. The empirical results show that certain peak-rate specifications outperform the distributed-lag specification, lending support to the notion that the equilibrium quantity of MMMFs varies in a ratchet-like fashion.