College of Economics :: HUNH?

QUANTITY :: Money Supply ... where is it?? YIKES!!

" ... Controlling the money supply through the central bank is known as monetary policy. Controlling it through deficit government spending is called fiscal policy ..."

" ... Money inflates easily and quickly, but it deflates slowly and at great cost. In a downward direction, prices are said to suffer from "price rigidities" or "price stickiness." There are several reasons for this.

One is psychological -- people hate to cut their prices and wages. Another is that salaries and wages are often locked into contracts, the average of which is three years. And for many, cutting prices incurs certain costs (reprinting, recalculating, reprogramming, etc.) that may not make the price change seem worth it.

Even if they do decide to change prices, it takes many companies quite some time to put them into effect. Sears, for example, has to reprint and remail all its catalogues.

Another likely reason is that entrepreneurs don't want to sell things below cost, so they might wait for their suppliers to cut prices first -- but in a circular economy, everyone would be waiting for everyone else to cut their prices.

The penalty for cutting prices first is a profit loss. Furthermore, with reduced sales volume, the unit cost of production is already going up, which only makes price reduction all the more difficult. ... " (A Critique of the Chicago School of Economics: A BRIEF REVIEW OF KEYNESIAN THEORY [SOURCE] )"

" ... How does all this relate to national economic policy? Keynesians believe their policies allow the government to take the rough edges off the business cycle.

In other words, Keynesian policy is counter-cyclical: when unemployment starts rising, the government expands the money supply; when inflation starts rising, the government contracts the money supply.

Another way of putting this is that the government is involved in a balancing act, creating just enough money to cover the natural amount of economic activity, without leaning either towards inflation or unemployment.

Rebutting this policy is where the Chicago School enters the story. ... " (ibid)

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