bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

maximum impact on the rate of inflation after approximately two years. We
might then talk about the short-run effects of monetary policy as being the
impact on the economy over six months or a year and the long-run effects
as being the impact over two years or longer. This might sometimes be useful
but is rather arbitrary and has no relationship with the idea that the long
run implies equilibrium. As we shall see in Chapter 8, within an equilibrium
framework, the long run describes an ideal world in which all expectations
are fulfilled and economic agents are not subject to money illusion —
that is, they do not confuse real and money values.
We can sum this section up as follows:
• changes in the relationship between the demand for and supply of liquid
resources (‘money’ and ‘credit’) at an aggregate level can have a
variety of important impacts on the economy depending on the extent to
which the authorities are able or choose to respond to those changes;
• at an individual level, people are influenced only indirectly, even if
strongly — through changes in the interest rate, the rate of inflation, or
the ability to obtain credit.
In this section, we have established the following questions to be taken
up in later chapters:
1. What determines the supply of money in the economy and changes in
that supply?
2. To what extent, if at all, can the monetary authorities directly control
this supply?
3. How does the system respond to an increased demand for credit at
existing interest rates?
4. Given any limitations on their ability to act, how should the monetary
authorities respond to an increased demand for credit?
1.4 The development of money within economies
THE MEANING OF MONEY 15
Pause for thought 1.3:
Keynes is widely quoted as having said: ‘In the long run we are all dead’. Is this
an accurate quotation? In the light of the above discussion, what do you think he
might have meant?
We have spent a considerable time discussing the meaning of ‘money’. We
have also looked at the possible links between money, prices, and output in
an economy and set down a number of issues to which we must return later