With the new equation for Effective Demand, I want to go back and pull out the Aggregate Supply - Effective Demand model from past posts. To see those posts, you can click on the link at the right under Categories.
Here is what the model looks like from 4thQ-2012 to 4thQ-2014.
The interesting thing is that the effective demand limit curves kept pointing to the same place since 2012... see circle around $16300 billions in real GDP (2009 dollars). Those ED limit lines show more consistency than before.
The last two lines of 2014 (purple and black) starting moving away from the circle destination. 3rdQ-2014 is the purple line just starting to rise away from the others. 4thQ-2014 is the black line which jumped to a higher level. So, just as real GDP was hitting the $16300 level in the second half of 2014, which would have constrained the economy, effective demand found a way to jump to a higher level. The main causes were easing of monetary policy, lower long-term rates and falling headline inflation.
Is effective demand shifting to a new level? I will be watching the new data as it comes in...