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monetary changes could lead to modifications in real output, in the same
direction.
A logical and coherent outcome of this specific scenario, where
possible misperceptions hold, becomes materialized in a situation whereby rational
agents do not have favorable expectations about the economy, and at the same
time they lack perfect price information. Therefore, an increase in money supply
would affect real economic variables
i.e.
, output. Under this scenario, an increase
in the money supply need not be translated into price rises. Considering this
scenario, its implications should be considered. For example, this may imply a
reverse direction on Friedman’s constant. As a result, an economic recession
might occur given a monetary contraction.
An alternative to what has been revised in relation with Friedman constant is
related to luxuries goods. He mentions that for this kind of articles, a coefficient
greater than one is expected for the income elasticity of demand for real
balances
If the coefficient for luxuries is bigger than one, then it should follows
that the respective coefficient for normal goods is close to one. These
interpretations convey necessarily the
ceteris paribus
clause, since money velocity
and trade volume are considered to remain without change. If these last two
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“These rational agents are then placed in a setting in which the information
conveyed to traders by market prices is inadequate to permit them to distinguish
real from monetary disturbances. In this setting, monetary fluctuations lead to real
output movement in the same direction.” Lucas (1972).
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This is endorsed by Friedman, when he analyses the econometric implications of
rises in real cash balances or real rises in the stock of money, as follows: “The
secular rise in real income has been accompanied by a rise in real cash balances
per unit of output -a decline in velocity- from which Selden concludes that the
income elasticity of the demand for real balances is greater than unity—cash
balances are a ‘luxury’ in the terminology generally adopted.” Friedman (1956).