Vertical LM is Not Vertical AS
By Bryan Caplan
I think it really is possible to have fluctuations in employment.
Bryan’s thinking applies in a frictionless economy that is always at
full employment, but I don’t think it applies in reality.
Frankly, this is a straw man. I believe in fluctuations in employment. I believe in involuntary unemployment – and I don’t think that government is its sole cause. I believe that changes in aggregate demand affect output and employment, at least in the short-run. In technical terms, I believe that short-run AS is not vertical.
But that is not the issue where Brad and I disagree. What we disagree about, rather, is whether fiscal policy affects aggregate demand. When government spends more (or taxes less), does total spending rise as a result? I say no. In technical terms, I believe that the LM curve is roughly vertical.
By analogy, Arnold seems to think I’m saying that giving an engine more gas won’t increase its rpms. But what I’m really saying is that turning on the radio doesn’t deliver more gas to the engine.