Greg Mankiw poses a question about aggregate supply (AS) and aggregate demand (AD) on his blog today. He is responding to a note (he links to it) by Paul Krugman on New Deal wage policies. (The note is very well done and should be useful in the classroom - for personal benefit if not for direct student use.)
Mankiw's counter is that while policies implemented in extraordinary circumstances may have different (positive) effects on AD than they would have in "normal times." The changes in rules (tax policy, etc.) changes expectations and may actually have a negative impact on investment, which is a more volatile part of AD.
I have to admit it's an interesting argument that appears to have some merit.
What do you think? Can/Do policy changes have significant impact on expectations and change that important investment portion of AD?
I look forward to your comments.