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THENEUTRALI
TYOFMONEYANDFLEXI
BI
LI
TYOFWAGESAND
A st
apl
ei
ncl
assi
caleconomi
cs,t
heneut
r
al
i
t
yofmoneysuggest
st
hat
changesi
nt
hesuppl
yofmoneyi
naneconomyonl
yaf
f
ectnomi
naleconomi
c
v
ar
i
abl
essuchasexchanger
at
es,wages,andt
hepr
i
cesofgoodsandser
v
i
ces
...
Theneut
r
al
i
t
yofmoneyt
heor
yi
mpl
i
est
hatt
he
cent
r
albank
does
notaf
f
ectt
her
eal(
ormaj
or
)v
ar
i
abl
eswi
t
hi
naneconomy
...
Realbusi
nesscy
cl
emodel
s
emphasi
zer
ealf
act
or
s,
suchast
echnol
ogi
calchanges,
i
ndet
er
mi
ni
ngeconomi
c
f
l
uct
uat
i
on,
whi
l
emonet
ar
ybusi
nesscy
cl
emodel
sadv
ocat
et
her
ol
eofmoneyi
n
gener
at
i
ngbusi
nesscy
cl
es
...
Ther
e was of cour
se consi
der
abl
e
di
sagr
eementont
henat
ur
eandst
r
engt
hoft
her
el
at
i
onshi
pbet
weenmoneyand
out
putandont
her
el
at
i
v
epowerofmonet
ar
yandf
i
scalpol
i
cy
...
Monet
ar
yneut
r
al
i
t
yi
sani
mpor
t
antpr
oper
t
yofr
eal
busi
nesscy
cl
emodel
s
...
I
ni
t
i
al
l
yr
ealbusi
nesscy
cl
emodel
swer
econst
r
uct
edwi
t
houtmonet
ar
y
DA’
sMACROECONOMI
CSPage1
f
eat
ur
es
...
Butaf
t
erbui
l
di
ngt
hei
rr
ealmodelt
heyconcl
udedt
hatt
headdi
t
i
onofa
monet
ar
ysect
ormaynotbenecessar
ysi
ncebusi
nesscy
cl
escanbeexpl
ai
ned
al
mostent
i
r
el
ybyr
ealquant
i
t
i
es
...
Ki
ngandPl
osserr
ej
ectt
heor
t
hodoxmonet
ar
i
sti
nt
er
pr
et
at
i
onofmoney
t
oout
putcausal
i
t
y
...
Recentt
heor
et
i
calef
f
or
t
shav
eat
t
empt
edt
opr
ov
i
dear
econci
l
i
at
i
onby
al
l
owi
ngt
echnol
ogyt
obeendogenous
...
Cr
i
t
i
cspoi
ntoutt
hatt
heev
i
dencedoes
notsuppor
tt
heassumpt
i
onofneut
r
al
i
t
yofmoney
...
Monet
ar
ypol
i
cyappear
st
ohav
east
r
ongi
nf
l
uenceont
her
eal
economy
...
Ther
e
ar
enomar
keti
mper
f
ect
i
ons
...
RBC pr
oponent
s
ar
guet
hatt
hedegr
eeofpr
i
cest
i
cki
nessoccur
r
i
ngi
nt
her
ealwor
l
di
snotf
or
under
st
andi
ng economi
cf
l
uct
uat
i
ons
...
Wages and pr
i
ce st
i
cki
ness expl
ai
ns i
nv
ol
unt
ar
y
unempl
oy
mentandnonneut
r
al
i
t
yofmoney
...
Adv
ocat
esoft
hi
st
heor
ybel
i
ev
e
t
hatmacr
oeconomi
st
sshoul
dbaset
heanal
y
si
sont
hesameassumpt
i
on
...
Toexpl
ai
nst
i
cki
nessof
pr
i
ces,
t
heyr
el
yont
hev
ar
i
ousnewKey
nesi
ant
heor
i
es
...
Fl
uct
uat
i
onsi
nt
heeconomyasa
whol
e come f
r
om changes i
n aggr
egat
e suppl
y or aggr
egat
e demand
...
A
shockt
hatshi
f
t
st
heaggr
egat
edemandcur
v
ei
scal
l
edademandshock,anda
shockt
hatshi
f
t
st
heaggr
egat
esuppl
ycur
v
ei
scal
l
edasuppl
yshock
...
One goaloft
he modelofaggr
egat
e suppl
yand
aggr
egat
edemandi
st
oshowhowshockscauseeconomi
cf
l
uct
uat
i
ons
...
Economi
st
suset
het
er
m st
abi
l
i
zat
i
onpol
i
cyt
or
ef
ert
o
pol
i
cyact
i
onsai
medatr
educi
ngt
hesev
er
i
t
yofshor
t
r
uneconomi
cf
l
uct
uat
i
ons
...
I
nar
ealbusi
ness cy
cl
e model
,f
l
uct
uat
i
ons ar
i
se f
r
om i
ndi
v
i
dual
s’
r
esponsest
ochangesi
nt
heeconomi
cenv
i
r
onment
...
I
nt
hesemodel
s,i
twoul
dbesubopt
i
malf
orpol
i
cy
DA’
sMACROECONOMI
CSPage3
maker
st
oel
i
mi
nat
et
hebusi
nesscy
cl
ei
ft
heycoul
dact
ual
l
ydoso
...
I
n
r
ealbusi
nesscy
cl
emodel
s,t
her
ol
eofmoneyi
st
odet
er
mi
net
hepr
i
cel
ev
el
,
mucht
hesameasi
nt
heor
i
gi
nalcl
assi
calmodel
...
I
tf
ol
l
ows,
t
hen,
t
hatmonet
ar
ypol
i
cyshoul
df
ocusoncont
r
ol
l
i
ng
t
hepr
i
cel
ev
el
...
When
weconsi
derf
i
scalpol
i
cy
,howev
er
,wewi
l
lseet
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t
er
nat
i
v
ev
i
ew oft
he
opt
i
malconductofmonet
ar
ypol
i
cyemer
gesf
r
om t
her
ealbusi
nesscy
cl
et
heor
y
...
Monet
ar
ypol
i
cycannotaf
f
ectout
putandempl
oy
ment
,
andev
en
i
fi
tcoul
d,
i
twoul
dbesubopt
i
mal
t
ot
r
yt
oel
i
mi
nat
et
hebusi
nesscy
cl
e
...
Theef
f
ectwi
l
lnotbecausedbyanef
f
ectonaggr
egat
e
demand,asi
nt
heKey
nesi
anmodel
,butbysuppl
y
si
deef
f
ect
s
...
Mor
eov
er
,t
heseef
f
ect
swi
l
lbedi
st
or
t
i
onar
y
...
Ev
enal
umpsum t
axwi
l
laf
f
ect
i
ndi
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dual
behav
i
orbyaf
f
ect
i
ngweal
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hov
ert
hepl
anni
nghor
i
zon
...
g
...
Thi
si
swher
eanal
t
er
nat
i
v
er
ol
ef
ormonet
ar
ypol
i
cyemer
ges
(
al
t
er
nat
i
v
et
osi
mpl
ykeepi
ngi
nf
l
at
i
onl
owt
hr
oughsl
ow,st
eadymoneygr
owt
h)
...
I
nt
hel
ongr
uni
nv
est
mentmust
be hi
gher i
f gov
er
nment spendi
ng i
s hi
gher
...
Whengov
er
nmentspendi
ng
goesup,t
hehousehol
df
eel
spoor
er(
becausei
thast
opaymor
ei
nt
axes,ei
t
her
now ori
nt
hef
ut
ur
e)
...
Wor
ki
ngmor
er
ai
sesout
put
...
Thet
er
m economi
st
susef
or
t
hi
s pr
act
i
ce i
n whi
ch t
he gov
er
nmentget
sr
ealr
esour
ces t
hr
ough money
cr
eat
i
on
...
I
nt
her
ealbusi
nesscy
cl
e
model
,i
tf
ol
l
owst
hatt
heopt
i
maluseofmonet
ar
yandf
i
scalpol
i
ci
esi
st
o
combi
net
hem soast
omi
ni
mi
z
et
het
ot
alcost
sf
r
om i
nf
l
at
i
onandt
axdi
st
or
t
i
on
...
DA’
sMACROECONOMI
CSPage5
SUPPLYSI
DEECONOMI
CS
Suppl
y
si
deeconomi
csi
sar
el
at
i
v
el
ynewt
er
m whi
chcamei
nt
ousei
nt
he
mi
d1970sasar
esul
toft
hef
ai
l
ur
eofKey
nesi
andemandsi
depol
i
ci
esi
nt
heUS
economywhi
chl
edt
ost
agf
l
at
i
on
...
Ar
t
hurLaf
f
er
,oneoft
hef
i
r
stmaj
orpr
oponent
sofsuppl
y
si
deeconomi
cs
...
Suppl
ysi
deeconomi
csi
sal
socal
l
edReaganomi
csort
he
“
t
r
i
ckl
edown”pol
i
cy
...
SPr
esi
dentRonal
dReaganpr
omot
edt
hei
deat
hatt
ax
cut
satt
het
op,f
ori
nv
est
or
sandent
r
epr
eneur
s,pr
ov
i
dei
ncent
i
v
et
osav
eand
i
nv
est
...
“
Suppl
y
si
deeconomi
cs”i
susedt
odescr
i
behowchangesi
nmar
gi
nalt
ax
r
at
es i
nf
l
uence economi
c act
i
v
i
t
y
...
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y
si
deeconomi
cpol
i
cyofcut
t
i
nghi
ghmar
gi
nalt
axr
at
es,
DA’
sMACROECONOMI
CSPage6
t
her
ef
or
e,
shoul
dbev
i
ewedasal
ongr
unst
r
at
egyt
oenhancegr
owt
hr
at
hert
han
ashor
t
r
unt
oolt
oendr
ecessi
on
...
Moder
nsuppl
y
si
deeconomi
csl
ay
semphasi
sonpr
ov
i
di
ngal
lt
y
pesof
economi
ci
ncent
i
v
est
or
ai
seaggr
egat
esuppl
yi
nt
heeconomy
...
I
nor
dert
omakesomet
hi
ng,a
pr
oducerdoesnotneedt
obegi
v
enanymoney
...
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ncent
i
v
est
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oducer
sar
eessent
i
alt
oi
nv
est
,pr
oduceandempl
oy
...
Mai
nFeat
ur
esofSuppl
y
Si
deEconomi
cs:
Thegov
er
nmentpl
ay
sal
i
mi
t
edr
ol
ei
nl
i
ber
al
i
si
ngmar
ket
s,r
educi
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axes
andf
r
eei
ngt
hel
abourmar
ket
...
1
...
Toassesst
hel
i
kel
yef
f
ect
soft
axr
educt
i
ons,t
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st
i
ngui
sh
bet
weeni
ncomeandsubst
i
t
ut
i
onef
f
ect
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nt
hemar
gi
nalr
at
eofi
ncome
t
ax
...
Ar
educt
i
oni
nper
sonalt
axr
at
esi
ncr
easest
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ncent
i
v
eofpeopl
et
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k
and sav
e mor
e
...
Reduct
i
oni
nmar
gi
nalt
axr
at
esbyi
mpr
ov
i
ngt
hewor
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f
or
toft
hepeopl
eal
so
i
ncr
easest
hei
rpr
oduct
i
v
ecapaci
t
yandt
hel
ev
el
ofout
putandempl
oy
menti
nt
he
economy
...
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f
ectofasuppl
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si
det
axcuti
si
l
l
ust
r
at
edi
nFi
g
...
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out
put
or
GDP
i
s
measur
ed
al
ong t
he
hor
i
zont
al
axi
s
and
t
hepr
i
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elont
hev
er
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i
calaxi
s
...
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sat
ax
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i
r
ms
...
Asar
esul
t
,suppl
i
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abourandcapi
t
al
i
ncr
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chshi
f
tt
heaggr
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esuppl
ycur
v
eASt
ot
her
i
ghtasAS1
...
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esul
t
,
t
hepr
i
cel
ev
elf
al
l
st
oOP1and
t
her
eal
out
puti
ncr
easest
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esul
tofat
axcut
...
Hi
gher
i
nv
est
mentl
eadst
ot
hepr
oduct
i
onofmor
egoodsandser
v
i
cesperuni
tofl
abour
and capi
t
al
...
Theyal
so
f
av
ourr
educedest
at
et
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orsmal
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ar
mer
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l
li
nducet
hem t
ospend
mor
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nput
ssoast
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ncr
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oduct
i
on
...
Mor
eov
er
,t
axr
educt
i
onsr
educe‘
under
gr
ound’(
bl
ackmar
ket
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i
v
i
t
y
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eexchangei
snotr
ecor
dedi
nt
hebooksandnot
axesar
epai
d
...
I
ncr
easi
ngGr
owt
hRat
e:
Accor
di
ngt
osuppl
y
si
deeconomi
st
s,t
axcut
si
ncr
easet
hedi
sposabl
e
i
ncomeoft
hepeopl
ewhor
ai
seaddi
t
i
onaldemandf
orgoodsandser
v
i
ces
...
Thi
sl
eadst
obal
ancedgr
owt
hi
nt
heeconomywi
t
houtshor
t
ages
...
Thi
s,
i
nt
ur
n,l
eadst
oani
ncr
easei
nt
her
ealdi
sposabl
ei
ncomeoft
hepeopl
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ch
r
ai
sesconsumpt
i
on,
out
putandempl
oy
ment
...
I
ncr
easei
ni
nv
est
mentl
eadst
oani
ncr
easei
nt
heeconomy
’
s
capi
t
alst
ock,t
oi
ncr
easei
npr
oduct
i
v
i
t
y
,t
ol
ar
gerout
put
,l
owi
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l
at
i
on,hi
ghl
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el
ofempl
oy
mentandhi
ghgr
owt
hr
at
eoft
heeconomy
...
TheLaf
f
erCur
v
e
Themostpopul
araspectofsuppl
y
si
deeconomi
csi
st
heLaf
f
ercur
v
e
named af
t
eri
t
sor
i
gi
nat
orPr
of
...
TheLaf
f
ercur
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edepi
ct
st
he
r
el
at
i
onbet
weent
axr
at
eandt
axr
ev
enue
...
Thi
st
axcut
,
i
nt
ur
n,
wi
l
l
i
ncr
easet
het
axr
ev
enue
...
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ft
het
axr
at
ei
s100%,
peopl
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l
lhav
enoi
ncent
i
v
et
owor
k,sav
eandi
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estatal
lbecauset
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e
i
ncomewi
l
lgot
ot
hegov
er
nment
...
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he
t
axr
at
ei
ncr
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r
om 0%t
o100%,
t
axr
ev
enuecor
r
espondi
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yr
i
sesf
r
om zer
o
t
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elandt
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ar
t
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i
ni
ngt
ozer
o
...
Fi
gur
eshowst
heLaf
f
ercur
v
ewher
et
het
axr
at
e(
0%)i
st
akenont
he
hor
i
zont
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sandt
het
axr
ev
enueont
hev
er
t
i
calaxi
s
...
TheLaf
f
ercur
v
ei
supwar
dsl
opi
ng
...
Att
her
el
at
i
v
el
yl
owt
axr
at
eT1,
t
het
axr
ev
enuei
sR1
...
Ther
eaf
t
er
,
f
ur
t
herr
i
sei
nt
het
axr
at
ewi
l
lr
educer
ev
enuet
ot
hegov
er
nment
...
Accor
di
ngt
oLaf
f
er
,
ani
mpor
t
antf
eat
ur
eoft
heLaf
f
ercur
v
ei
st
hati
thasa
nor
malr
angeandapr
ohi
bi
t
i
v
er
ange
...
I
nt
henor
malr
ange,
i
ncr
easesi
nt
het
axr
at
ebr
i
ngmor
er
ev
enuet
ot
hegov
er
nment
...
Consequent
l
y
,t
hef
al
li
nout
putmor
et
han
of
f
set
st
her
i
sei
nt
axr
at
e
...
Taxr
at
ecut
saf
f
ectr
ev
enues
...
I
nt
hel
ongt
er
m,
busi
nessact
i
v
i
t
yi
ncr
eases,
DA’
sMACROECONOMI
CSPage11
compani
eshi
r
emor
e,whoi
nt
ur
nspendmor
e,andt
hi
sl
eadst
oeconomi
c
gr
owt
h
...
4
...
Theyar
eagai
nstmonet
i
zat
i
onofbudget
def
i
ci
t whi
ch t
he Key
nesi
ans adv
ocat
e
...
Thi
swi
l
li
ncr
easeempl
oy
ment
,i
ncomeandgr
owt
h
r
at
eoft
heeconomy
...
Monet
ar
yPol
i
cy
:
Anot
herf
eat
ur
e ofsuppl
y
si
de pol
i
cyi
st
o hav
er
est
r
ai
ned monet
ar
y
ex
pansi
oni
nor
dert
okeept
hei
nf
l
at
i
onr
at
el
ow
...
Reduct
i
oni
nWel
f
ar
eBenef
i
t
s:
Tor
educeunempl
oy
ment
,
suppl
y
si
deeconomi
st
semphasi
ser
educt
i
oni
n
wel
f
ar
e benef
i
t
s,especi
al
l
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