Continuing from this post, I decided to look at what the Aggregate Demand (AD = NGNP) and Aggregate Supply (AS = MB) curves look like in these next two posts. Basically, I looked at a fixed point on the surface for a given year and looked at the curves at fixed AD (a demand curve) and fixed AS (a supply curve). I also showed what the curves looked like for a 5% boost in AD and AS from the fixed point. The former are shown as solid red (supply) and blue (demand) lines, the latter (boosted) are shown as dashed versions. Here is the graph for 2012:
Note the weird parallel curves in 2000 (it persists over most of the early 2000s until the financial crisis). Speculation: does this have anything to do with the strange flattening out of the monetary base growth in the 2000s? Did the economy become unresponsive to changes in the monetary base (and NGDP) and lead the Fed to think its tight money policy was appropriate? Would a slowly tightening policy
would go unnoticed in the aggregate data? I don't know the answer to these questions. I don't even know if this model should actually be able to suggest them! In the next post, I show the series as we go through the financial crisis.