ECON 101 Lecture 19: Econ Week 11
Document Summary
Expansionary monetary policy cannot loosen the bonds of scarcity and therefore it cannot promote long-term economic growth. Rapid growth of the money supply will lead to inflation. Shifts in monetary policy will influence the general level of prices and real output only after time lags that are long and variable. Why proper timing of monetary policy changes is difficult. The long and variable time lags between a monetary policy shift and their impact on the economy will make it difficult for policy-makers to institute changes in a manner that will promote economic stability. Given our limited forecasting ability, policy errors are likely. If monetary policy makers are constantly shifting back and forth, policy errors will occur. Thus, constant policy shifts are likely to generate instability rather than stability. Monetary policy that provides approximate price stability (persistently low rates of inflation) is the key to sound stabilization policy.
