This preview shows page 1. Sign up to view the full content.
Unformatted text preview: Nurse, Food Handlers, Tax and Securities 2. THE MONEY MARKET
favorable effect on output and employment are the first to surface while the unfavorable effects on prices are long delayed. Conversely, policymakers sometimes must move to rein in inflationary excesses even though temporarily higher unemployment may precede evidence of forthcoming lower inflation. Many economists advocate what they call a gradualist policy of fighting inflation in which money growth is systematically slowed in small steps so that the adverse side effects on unemployment and output are minimized. This strategy of gradual deceleration in monetary expansion was embodied in the Federal Reserve's program beginning in 1979 of lowering its targets for effective growth in the monetary aggregates each year. LONG–TERM POLICY
An anti–inflation strategy ultimately must bring monetary expansion down to a rate consistent with stable prices. This does not mean zero growth in money because even with stable prices some growth is needed from year to year to provide for the transactions needs of a growing economy. However, this growth in money probably would not have to be as large as the long-term growth rate of the economy. At least since the end of World War lI, the U.S. economy has been economizing on the amount of money it needs to carry out a given volume of transactions. MONEY AND INTEREST RATES
Monetary growth has important consequences for interest rates. These consequences are very different in the long run from what they are in the short run. Monetary expansion at first reduces interest rates by expanding the supply of funds available for borrowing. But since monetary expansion very quickly leads to an expansion in economic activity, business and households will increase their borrowing demands and this will tend to reverse the initial fall in interest rates. Moreover, if high money growth persists, it will result ultimately in higher inflation. If this occurs, lenders will demand a higher “inflation premium” in interest rates to protect...
View Full Document
- Spring '10