"In the real world...": aggregate demand versus price
"(In the real world things are more complicated, but never mind.)" The rallying cry of economists through all history. This time it comes from Paul Krugman (the paper is a few months old but he points to it in today's column ), but I don't mean to pick him out unfairly. It's just a less formal way of saying "we need to simplify our models otherwise we don't know how to work with them". Sometimes, though, it would be useful to be explicit about how far from the real world we believe our models are. I just want to take up one point in the paper. Paul assumes that, under normal circumstances the AD (aggregate demand) curve slopes down and the AS (aggregate supply) curve slopes up. His point is that in a liquidity trap (like now and in the 1930s) the AD curve may not slope downwards after all, so standard results about the equilibrium point are not applicable. Fair enough. But I would question whether the AD and AS curves behave as described even in nor...