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Actually in classical macro theory, lower interest rates (which amounts to the Fed increasing the money supply) leads to greater investment due to cheaper credi

Actually in classical macro theory, lower interest rates (which amounts to the Fed increasing the money supply) leads to greater investment due to cheaper credit, leading to higher output growth in the short run and subsequently lower unemployment. With higher demand for their labour, workers will ask for more cash leading to wage inflation. And because wages are a major input into goods and services, higher wages will cause firms to raise prices - hence price inflation. That's the theory anyway. There's been alot of criticism on it, but macroeconomists in reserve banks around the world tend to subscribe to this theory when using interest rates to control growth and inflation. The relationship between interest rates and the dollar is via the interest rate parity condition (http://en.wikipedia.org/wiki/Interest_rate_parity http://en.wikipedia.org/wiki/Interest_rate_parity), which is a feature of open markets (to take into account arbitrage opportunities). Lowering the value of the dollar doesn't cause inflation directly. I suppose it does so indirectly by stimulating exports and raising output growth, which leads to lower unemployment and so on. Lowering interest rates will likely increase inflation, but hyperinflation is a bit rich. Current US inflation is 4%, which is high, but a long way from hyperinflation (see zimbabwe - 1000%+).

david927 19y ago
You could have just said: > Actually in classical macro theory, lower interest rates (which amounts to the Fed increasing the money supply) ... hence price inflation. If the money supply is increased (more dollar bills are printed), you'll need more to pay for the same thing: and that is directly price inflation. You can ignore the expected effects in the middle. (In fact, there's no direct correlation to cheaper credit and greater investment.) 4% is stated core inflation. The true inflation number is much higher, but it's hard to know because there's a lot of effort put into diminishing it, for obvious reasons. Sure we're not in hyperinflation yet, but the idea is that it could get there quickly. While it seems impossible from the comfort of growing up in the second half of the 20th century, America is in much more trouble than it realizes.

david927 19y ago

You could have just said: > Actually in classical macro theory, lower interest rates (which amounts to the Fed increasing the money supply) ... hence price inflation. If the money supply is increased (more dollar bills are printed), you'll need more to pay for the same thing: and that is directly price inflation. You can ignore the expected effects in the middle. (In fact, there's no direct correlation to cheaper credit and greater investment.) 4% is stated core inflation. The true inflation number is much higher, but it's hard to know because there's a lot of effort put into diminishing it, for obvious reasons. Sure we're not in hyperinflation yet, but the idea is that it could get there quickly. While it seems impossible from the comfort of growing up in the second half of the 20th century, America is in much more trouble than it realizes.