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Does the Aggregate Demand Curve Suffer from the Fallacy of Composition?

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  • Ira Saltz
  • Pat Cantrell
  • Joseph Horton

Abstract

Colander (1995) identifies four main explanations of the inverse relationship between the price level and aggregate demand: the Pigou effect, the Keynes effect, the international price level effect, and the intertemporal price level effect. This paper examines whether any of these explanations can be justified. All four are found to at least potentially suffer from some form of the fallacy of composition. These problems are the result of the fallacious use of microeconomic principles to draw conclusions about the macroeconomy. The effect of price changes on aggregate demand appears to be ambiguous or negligible.

Suggested Citation

  • Ira Saltz & Pat Cantrell & Joseph Horton, 2002. "Does the Aggregate Demand Curve Suffer from the Fallacy of Composition?," The American Economist, Sage Publications, vol. 46(1), pages 61-65, March.
    • Handle: RePEc:sae:amerec:v:46:y:2002:i:1:p:61-65
    DOI: 10.1177/056943450204600108
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