How do changes in short-term intere

How do changes in short-term interest rates affect the overall economy? In the short run, an
expansionary monetary policy that reduces interest rates increases interest-sensitive spending, all
else equal. Interest-sensitive spending includes physical investment (i.e., plant and equipment) by
firms, residential investment (housing construction), and consumer-durable spending (e.g.,
automobiles and appliances) by households. As discussed in the next section, it also encourages
exchange rate depreciation that causes exports to rise and imports to fall, all else equal. To reduce
spending in the economy, the Fed raises interest rates, and the process works in reverse. An
examination of U.S. economic history will show that money- and credit-induced demand
expansions can have a positive effect on U.S. GDP growth and total employment. The extent to
which greater interest-sensitive spending results in an increase in overall spending in the
economy in the short run will depend in part on how close the economy is to full employment.
When the economy is near full employment, the increase in spending is likely to be dissipated
through higher inflation more quickly. When the economy is far below full employment,
inflationary pressures are more likely to be muted. This same history, however, also suggests that
over the longer run, a more rapid rate of growth of money and credit is largely dissipated in a
more rapid rate of inflation with little, if any, lasting effect on real GDP and employment. (Since
the crisis, the historical relationship between money growth and inflation has not held so far, as
will be discussed below.)
Economists have two explanations for this paradoxical behavior. First, they note that, in the short
run, many economies have an elaborate system of contracts (both implicit and explicit) that
makes it difficult in a short period for significant adjustments to take place in wages and prices in
response to a more rapid growth of money and credit. Second, they note that expectations for one
reason or another are slow to adjust to the longer-run consequences of major changes in monetary
policy. This slow adjustment also adds rigidities to wages and prices. Because of these rigidities,
changes in the growth of money and credit that change aggregate demand can have a large initial
effect on output and employment albeit with a policy lag of six to eight quarters before the
broader economy fully responds to monetary policy measures. Over the longer run, as contracts
are renegotiated and expectations adjust, wages and prices rise in response to the change in
demand and much of the change in output and employment is undone. Thus, monetary policy can
matter in the short run but be fairly neutral for GDP growth and employment in the longer run

Results (English) 2:

How do changes in short-term interest rates affect the overall economy? Short in The Run, an
expansionary interest Reduces Rates Increases Monetary Policy that interest-sensitive spending, all
equal Else. Interest-sensitive spending Includes physical Investment (IE, Plant and Equipment) by
firms, Residential Investment (Housing Construction), and Consumer-Durable spending (eg,
Automobiles and appliances) by households. As discussed in Section The next, it also encourages
Exchange Depreciation rate that causes Exports and Imports to Rise to Fall, all equal Else. To Reduce
spending in The Economy, The Fed raises interest Rates, and The Process Works in Reverse. An
Examination of US Economic Will history show that Money- and Credit-induced demand
Expansions Can Have a positive Effect on total US GDP growth and Employment. The extent to
which greater interest-sensitive spending results in an increase in Overall spending in The
Economy in The short Run Will depend in Part on How close The Economy is to full Employment.
When The Economy is near full Employment, The increase in spending is. likely to be dissipated
more Quickly Through Higher Inflation. When The Economy Far Below is full Employment,
Inflationary pressures are more likely to be muted. Same this history, however, also Suggests that
over The Longer Run, a more Rapid rate of growth of Money and Credit is largely dissipated in a
more Rapid rate of Inflation with Little, IF any, Lasting Effect on Real GDP and Employment. (Since
The Crisis, The historical growth Relationship between Money and Inflation has Held Not So Far, As
Below Will be discussed.)
Economists Have Two Explanations for this paradoxical behavior. First, they note that, in The short
Run, many economies Have an Elaborate System of contracts (Both implicit and Explicit) that
Makes it Difficult in a short period for significant adjustments to Take Place in Wages and prices in
Response to a more Rapid growth. of money and credit. Second, they note that Expectations for One
Reason or another are Slow to Adjust to The Longer-Run Consequences of Major Changes in Monetary
Policy. This slow adjustment also adds rigidities to wages and prices. Because of these Rigidities,
Changes in The growth of Money and Credit Aggregate demand that Change Can Have a Large Initial
Effect on output and Employment Policy albeit with a LAG of Six to Eight Quarters Before The
broader Economy Fully responds to Monetary Policy Measures. The Longer Run over, As contracts
are renegotiated and Adjust Expectations, Wages and prices Rise in Response to The Change in
demand and much of The Change in output and Employment is Undone. Thus, Monetary Policy Can
Run but be short Matter in The Fairly neutral for GDP growth and Employment in The Longer Run.