[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

tity of money increases. When the monetary authority tries to keep the nominal interest
rate constant, the quantity of money automatically increases as prices rise. Inflation
causes the money supply to automatically increase, further fueling and sustaining the
inflation.
In the full-employment model, we assumed that government controlled the supply
of money directly. Because full-employment output is determined by such factors
as labor supply, the capital stock, and the economy’s technology, changes in the
money supply led to proportional changes in the price level (see Chapter 28). When
the central bank adjusts the reserve supply to achieve an interest rate target, the
supply of money adjusts in line with prices. To halt the rise in inflation, the central
bank must raise its target interest rate to prevent the ongoing expansion of the
money supply. When inflation rose to high levels in the 1970s, central banks therefore
shifted from interest rate operating procedures to procedures that focused
more directly on controlling the money supply.
MONETARY POLICY OPERATING PROCEDURES ∂ 723