Figure 1 - uploaded by John Harvey
Content may be subject to copyright.
Monetary Model: purchasing Power Parity curve. 

Monetary Model: purchasing Power Parity curve. 

Source publication
Article
Full-text available
One would have thought that the financial crisis would have served as a decisive empirical test, separating the wheat from the chaff. Instead, very few schools of thought have shifted their positions. Part of the reason is no doubt because, as Einstein once said, theory determines what we see (Salam 1990, p. 99). To illustrate this point while at t...

Contexts in source publication

Context 1
... P/P* = S, where P is the home price level, P* is the foreign price level, and S is domestic currency units per foreign currency unit. Figure 1 shows this relationship in P and S space (note that because it necessarily begins at the origin, the slope will be exactly equal to P*). The Monetary Model assumes that purchasing power parity must hold at all times so that only points on this line are consistent with equilibrium. Points above it represent a trade deficit for the nation in question, while those below are a trade surplus. The adjustment process described above draws the economy back to the PPP ...
Context 2
... M is the supply of money, V is the velocity of money, P is the price level, and y is real output. Since they see the money supply as exogenous and given at any point in time and V as constant due to the fact that the behavioral and institutional characteristics that determine it change very slowly, only P and y may vary in the absence of a policy change. Every aggregate demand curve is drawn for a particular constant V and given M, and shows every combination of P and y that, when multiplied, yield MV. This yields the aggregate demand, y d , curve shown in Were we considering a flexible exchange rate regime, this would complete the specification of the model. Figures 1 and 2 would be placed side by side and whenever a change in price occurred in the domestic macroeconomy (as a result of a shift in y d or y s ), this would cause a movement along the PPP curve and a change in the exchange rate. Take, for example, the situation illustrated in Figure 3. If we begin with y d and y s , then the macroeconomy is in equilibrium at P 0 and y 0 . If purchasing power parity holds and the foreign price level is represented by the slope of PPP, the exchange rate (domestic currency units per foreign currency units) must be S 0 . Now assume that the central bank raises the money supply, thereby shifting y d to y d ...
Context 3
... P/P* = S, where P is the home price level, P* is the foreign price level, and S is domestic currency units per foreign currency unit. Figure 1 shows this relationship in P and S space (note that because it necessarily begins at the origin, the slope will be exactly equal to P*). The Monetary Model assumes that purchasing power parity must hold at all times so that only points on this line are consistent with equilibrium. Points above it represent a trade deficit for the nation in question, while those below are a trade surplus. The adjustment process described above draws the economy back to the PPP ...
Context 4
... M is the supply of money, V is the velocity of money, P is the price level, and y is real output. Since they see the money supply as exogenous and given at any point in time and V as constant due to the fact that the behavioral and institutional characteristics that determine it change very slowly, only P and y may vary in the absence of a policy change. Every aggregate demand curve is drawn for a particular constant V and given M, and shows every combination of P and y that, when multiplied, yield MV. This yields the aggregate demand, y d , curve shown in Were we considering a flexible exchange rate regime, this would complete the specification of the model. Figures 1 and 2 would be placed side by side and whenever a change in price occurred in the domestic macroeconomy (as a result of a shift in y d or y s ), this would cause a movement along the PPP curve and a change in the exchange rate. Take, for example, the situation illustrated in Figure 3. If we begin with y d and y s , then the macroeconomy is in equilibrium at P 0 and y 0 . If purchasing power parity holds and the foreign price level is represented by the slope of PPP, the exchange rate (domestic currency units per foreign currency units) must be S 0 . Now assume that the central bank raises the money supply, thereby shifting y d to y d ...