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Monetary policy

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Monetary policy is what the Federal Reserve hopes they are doing with all of those nifty printing presses. Reality, such as the banking crisis sometimes reminds the Fed of exactly how far off they sometimes are. The exact goal of monetary policy depends on the central bank, but policy is typically directed at two things; unemployment and inflation. The fact that the Fed accomplishes this by mixing fractional-reserve banking with money printing has a tendency to drive those with a limited grasp of abstract concepts into a frenzied stupor. Being in a stupor may seem at odds with being frenzied, but, trust me, there are no higher brain functions happening there.

How does it work?[edit]

There are a lot of nifty theories trying to answer exactly that question. The short wrong answer is; it doesn't quite work, but we get it close enough. The long wrong answer is; we change how much money is printed, and the real interest rate adjusts accordingly, until the price level catches up to it. If we print more money, real aggregate demand increases for at least a little bit, encouraging an expansion of business. The problem is that businesses would love to raise prices in order to soak up more profits from this extra demand. If firms could choose whatever price they wanted, they would set their prices just high enough to soak up the aggregate demand created by printing extra money. In this scenario, monetary policy would only serve to increase the rate of inflation. However, it is believed that a host of issues makes prices somewhat difficult for firms to change (a concept referred to as sticky prices), implying that there is some room for monetary policy to boost aggregate demand. Of course, actually modelling sticky prices requires some hand wavy simplifications, making it a rather contentious issue among experts who study it. It is important not to confuse these debates with the stark raving mad garbage spewed on libertarian economics forums: the economists debating this issue are interested in identifying how monetary policy works, not assuming they already know.

How it doesn't work[edit]

Several popular conspiracy theories have cropped up to explain exactly what it is the Fed is up to. These often involve

  • Selling you into Jewish slavery
  • Transferring your property into Jewish control
  • Ensuring your government is firmly within Jewish clutches

or, in short, an international Jewish conspiracy. Interestingly, the evil Jewish slave state involves low unemployment, stable inflation, easy access to the funds needed to start a business or go to school, and delicious bagels.

Challenge[edit]

Try to enforce monetary policy, exchange rate policy and an open capital policy all at once, and let us know how it goes.

See also[edit]