How to understand if AD is too high?

this set Twitter Comment caught my eye:

I agree with all three comments. Still, it might be helpful to explain this problem in my own way. Here are three claims:

1. There is no such thing as a “true” elasticity of aggregate demand.

2. Even if NGDP growth is abnormally high, aggregate demand is likely to be reasonable.

3. In this particular case, however, a rapid increase in NGDP indicates excessive AD.

Let’s take three claims at once:

1. I prefer to define AD as a rectangular hyperbola, where total nominal expenditure (ie, P*Y) is exactly the same at every point along the AD curve. In that case, the elasticity of aggregate demand is always exactly one. But many economists define AD in a different fashion and end up with a different estimate of the elasticity of aggregate demand. So if someone asks me, “What is the true elasticity of AD?” I would reply, “How are you defining AD?” It depends on what you hold constant along a given AD curve.

2. Suppose Kuwait’s NGDP is 50% oil and 50% other goods and services Also assume that 5% of Kuwaiti workers produce oil and 95% of Kuwaiti workers produce other goods and services. Now assume that global oil prices double almost overnight. Should the central bank of Kuwait maintain a stable NGDP? I would say no, because doing so would require a large reduction in non-oil nominal output. Because 95% of workers are in the non-oil sector and nominal wages are sticky, this will result in high unemployment. Targeting gross nominal labor income would probably make more sense for Kuwait.

3. Obviously there are examples of Kuwait something On recent events in the United States. We produce a lot of oil and oil prices have recently doubled. Nevertheless, the latest NGDP data in the US correctly indicates that there is excessive aggregate demand. We know this because we also see signs of excess demand from other indicators, such as faster nominal wage growth and higher job vacancies, which are not distorted by oil prices.

In conclusion, rapid increases in NGDP do not always signal additional AD. But in the case of the United States, rapid and above-trend NGDP growth is almost always an accurate signal of overheating.

We shouldn’t waste time trying to debunk some mythical concept like the “true” resilience of AD. Instead, we should focus on what path of nominal spending creates a stable economy.

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