Monetary policy is said to influence aggregate demand via: 1) the wealth effect regarding consumer spending 2) the interest rate effect, as a lower price level increases savings 3) the exchange rate effect.
Keynesians claim that the wealth effect is small, because money holdings are a minor part of household wealth. The exchange-rate effect is minor. Therefore the interest rate effect is the greatest of the three and thus the most important cause of the downward-sloping aggregate demand as the price level drops and output rises. But, contra Keynesianism, it seems to me that the wealth effect on households is the greatest of these, since what matters is MV, not money holdings at some moment in time. With lower prices, the flow of income MV buys more stuff, and that should swamp the interest rate effect. If Keynesians are correct, I'd be interested in an explanation. Fred Foldvary ===== [EMAIL PROTECTED]
