If there is no sticky inflation, then monetary policy will have only nominal effects.
How does monetary policy respond to inflation?
- The term "inflation" describes a general rise in price levels brought on by an increase in the amount of money; the rate of expansion of the money stock is higher than the rate of economic production.
- Although there is extensive economic discussion regarding the precise nature of price increases, in this context, the term "inflation" is used to refer specifically to a monetary phenomenon.
- When productivity increases more quickly than the money stock, it is referred to as deflation.
- A broad decline in prices and the cost of living results from this, which many economists curiously perceive as being detrimental.
- John Maynard Keynes' paradox of thrift serves as the foundation for the arguments against deflation.
- If inflation is not sticky, then the classical dichotomy will hold in the short run. This means that nominal variables will have only nominal effects on the economy.
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