{"id":475,"date":"2018-04-05T01:20:09","date_gmt":"2018-04-05T01:20:09","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/os-macroecon-e2\/chapter\/pitfalls-for-monetary-policy\/"},"modified":"2018-05-08T15:51:59","modified_gmt":"2018-05-08T15:51:59","slug":"pitfalls-for-monetary-policy","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-fmcc-macroeconomics\/chapter\/pitfalls-for-monetary-policy\/","title":{"raw":"Pitfalls for Monetary Policy","rendered":"Pitfalls for Monetary Policy"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Objectives<\/h3>\r\nBy the end of this section, you will be able to:\r\n<ul>\r\n \t<li>Analyze whether monetary policy decisions should be made more democratically<\/li>\r\n \t<li>Calculate the velocity of money<\/li>\r\n \t<li>Evaluate the central bank\u2019s influence on inflation, unemployment, asset bubbles, and leverage cycles<\/li>\r\n \t<li>Calculate the effects of monetary stimulus<\/li>\r\n<\/ul>\r\n<\/div>\r\n<p id=\"fs-idp7647456\">In the real world, effective monetary policy faces a number of significant hurdles. Monetary policy affects the economy only after a time lag that is typically long and of variable length. Remember, monetary policy involves a chain of events: the <strong><span class=\"no-emphasis\">central bank<\/span><\/strong> must perceive a situation in the economy, hold a meeting, and make a decision to react by tightening or loosening monetary policy. The change in monetary policy must percolate through the banking system, changing the quantity of loans and affecting interest rates. When interest rates change, businesses must change their investment levels and consumers must change their borrowing patterns when purchasing homes or cars. Then it takes time for these changes to filter through the rest of the economy.<\/p>\r\n<p id=\"fs-idp433616\">As a result of this chain of events, monetary policy has little effect in the immediate future. Instead, its primary effects are felt perhaps one to three years in the future. The reality of long and variable time lags does not mean that a central bank should refuse to make decisions. It does mean that central banks should be humble about taking action, because of the risk that their actions can create as much or more economic instability as they resolve.<\/p>\r\n\r\n<section id=\"fs-idp33604816\">\r\n<h3>Excess Reserves<\/h3>\r\n<p id=\"fs-idp81377104\">Banks are legally required to hold a minimum level of reserves, but no rule prohibits them from holding additional <strong>excess reserves<\/strong> above the legally mandated limit. For example, during a recession banks may be hesitant to lend, because they fear that when the economy is contracting, a high proportion of loan applicants become less likely to repay their loans.<\/p>\r\n<p id=\"fs-idm43462128\">When many banks are choosing to hold excess reserves, expansionary monetary policy may not work well. This may occur because the banks are concerned about a deteriorating economy, while the central bank is trying to expand the money supply. If the banks prefer to hold excess reserves above the legally required level, the central bank cannot force individual banks to make loans. Similarly, sensible businesses and consumers may be reluctant to borrow substantial amounts of money in a <strong><span class=\"no-emphasis\">recession<\/span>,<\/strong> because they recognize that firms\u2019 sales and employees\u2019 jobs are more insecure in a recession, and they do not want to face the need to make interest payments. The result is that during an especially deep recession, an expansionary monetary policy may have little effect on either the price level or the <strong><span class=\"no-emphasis\">real GDP<\/span>.<\/strong><\/p>\r\n<p id=\"fs-idp81069616\">Japan experienced this situation in the 1990s and early 2000s. Japan\u2019s economy entered a period of very slow growth, dipping in and out of recession, in the early 1990s. By February 1999, the Bank of Japan had lowered the equivalent of its federal funds rate to 0%. It kept it there most of the time through 2003. Moreover, in the two years from March 2001 to March 2003, the Bank of Japan also expanded the country's money supply by about 50%\u2014an enormous increase. Even this highly expansionary monetary policy, however, had no substantial effect on stimulating aggregate demand. Japan\u2019s economy continued to experience extremely slow growth into the mid-2000s.<\/p>\r\n\r\n<div id=\"fs-idp84692480\" class=\"economics clearup\">\r\n<div>\r\n<div class=\"textbox shaded\">\r\n<div id=\"fs-idp84692480\" class=\"economics clearup\">\r\n<h3>Should monetary policy decisions be made more democratically?<\/h3>\r\n<p id=\"fs-idp76150864\">Should a nation\u2019s Congress or legislature comprised of elected representatives conduct monetary policy or should a politically appointed central bank that is more independent of voters take charge? Here are some of the arguments.<\/p>\r\n<p id=\"fs-idp7939024\"><em>The Case for Greater Democratic Control of Monetary Policy<\/em><\/p>\r\n<p id=\"fs-idp85348880\">Elected representatives pass taxes and spending bills to conduct fiscal policy by passing tax and spending bills. They could handle monetary policy in the same way. They will sometimes make mistakes, but in a democracy, it is better to have elected officials who are accountable to voters make mistakes instead of political appointees. After all, the people appointed to the top governing positions at the Federal Reserve\u2014and to most central banks around the world\u2014are typically bankers and economists. They are not representatives of borrowers like small businesses or farmers nor are they representatives of labor unions. Central banks might not be so quick to raise interest rates if they had to pay more attention to firms and people in the real economy.<\/p>\r\n<p id=\"fs-idp50453696\"><em>The Case for an Independent Central Bank<\/em><\/p>\r\n<p id=\"fs-idp43911792\">Because the central bank has some insulation from day-to-day politics, its members can take a nonpartisan look at specific economic situations and make tough, immediate decisions when necessary. The idea of giving a legislature the ability to create money and hand out loans is likely to end up badly, sooner or later. It is simply too tempting for lawmakers to expand the money supply to fund their projects. The long term result will be rampant inflation. Also, a central bank, acting according to the laws passed by elected officials, can respond far more quickly than a legislature. For example, the U.S. budget takes months to debate, pass, and sign into law, but monetary policy decisions happen much more rapidly. Day-to-day democratic control of monetary policy is impractical and seems likely to lead to an overly expansionary monetary policy and higher inflation.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<span style=\"font-size: 1rem;text-align: initial\">The problem of excess reserves does not affect contractionary policy. Central bankers have an old saying that monetary policy can be like pulling and pushing on a string: when the central bank pulls on the string and uses contractionary monetary policy, it can definitely raise interest rates and reduce aggregate demand. However, when the central bank tries to push on the string of expansionary monetary policy, the string may sometimes just fold up limp and have little effect, because banks decide not to loan out their excess reserves. Do not take this analogy too literally\u2014expansionary monetary policy usually does have real effects, after that inconveniently long and variable lag. There are also times, like Japan\u2019s economy in the late 1990s and early 2000s, when expansionary monetary policy has been insufficient to lift a recession-prone economy.<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/section><section id=\"fs-idp108933952\">\r\n<h3>Unpredictable Movements of Velocity<\/h3>\r\n<p id=\"fs-idp120217808\">Velocity is a term that economists use to describe how quickly money circulates through the economy. We define the velocity of money in a year as:<\/p>\r\n\r\n<div id=\"fs-idp27763056\">[latex]\\begin{array}{rcl}\\text{Velocity}&amp; \\text{ = }&amp; \\frac{\\text{nominal GDP}}{\\text{money supply}}\\end{array}[\/latex]<\/div>\r\n<p id=\"fs-idp129550576\">Specific measurements of velocity depend on the definition of the money supply used. Consider the velocity of <span class=\"no-emphasis\">M1<\/span>, the total amount of currency in circulation and checking account balances. In 2009, for example, M1 was $1.7 trillion and nominal GDP was $14.3 trillion, so the velocity of M1 was 8.4 ($14.3 trillion\/$1.7 trillion). A higher velocity of money means that the average dollar circulates more times in a year. A lower velocity means that the average dollar circulates fewer times in a year.<\/p>\r\n<p id=\"fs-idp101875056\">See the following Clear It Up feature for a discussion of how deflation could affect monetary policy.<\/p>\r\n\r\n<div id=\"fs-idp53473568\" class=\"economics clearup\">\r\n<div>\r\n<div class=\"textbox shaded\">\r\n<h3>What happens during episodes of deflation?<\/h3>\r\n<p id=\"fs-idp111366880\"><span class=\"no-emphasis\">Deflation<\/span> occurs when the rate of inflation is negative; that is, instead of money having less purchasing power over time, as occurs with inflation, money is worth more. Deflation can make it very difficult for monetary policy to address a recession.<\/p>\r\n<p id=\"fs-idp166665632\">Remember that the real interest rate is the nominal interest rate minus the rate of inflation. If the <span class=\"no-emphasis\">nominal interest rate<\/span> is 7% and the rate of inflation is 3%, then the borrower is effectively paying a 4% real interest rate. If the nominal interest rate is 7% and there is <em>deflation<\/em> of 2%, then the real interest rate is actually 9%. In this way, an unexpected deflation raises the real interest payments for borrowers. It can lead to a situation where borrowers do not repay an unexpectedly high number of loans, and banks find that their net worth is decreasing or negative. When banks are suffering losses, they become less able and eager to make new loans. Aggregate demand declines, which can lead to recession.<\/p>\r\n<p id=\"fs-idp6287984\">Then the double-whammy: After causing a recession, deflation can make it difficult for monetary policy to work. Say that the central bank uses expansionary monetary policy to reduce the nominal interest rate all the way to zero\u2014but the economy has 5% deflation. As a result, the real interest rate is 5%, and because a central bank cannot make the nominal interest rate negative, expansionary policy cannot reduce the real interest rate further.<\/p>\r\n<p id=\"fs-idp129033200\">In the U.S. economy during the early 1930s, deflation was 6.7% per year from 1930\u20131933, which caused many borrowers to default on their loans and many banks to end up bankrupt, which in turn contributed substantially to the Great Depression. Not all episodes of deflation, however, end in economic depression. Japan, for example, experienced deflation of slightly less than 1% per year from 1999\u20132002, which hurt the Japanese economy, but it still grew by about 0.9% per year over this period. There is at least one historical example of deflation coexisting with rapid growth. The U.S. economy experienced deflation of about 1.1% per year over the quarter-century from 1876\u20131900, but real GDP also expanded at a rapid clip of 4% per year over this time, despite some occasional severe recessions.<\/p>\r\n<p id=\"fs-idp172318016\">The central bank should be on guard against deflation and, if necessary, use expansionary monetary policy to prevent any long-lasting or extreme deflation from occurring. Except in severe cases like the Great Depression, deflation does not guarantee economic disaster.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<p id=\"fs-idm73105584\">Changes in velocity can cause problems for monetary policy. To understand why, rewrite the definition of velocity so that the money supply is on the left-hand side of the equation. That is:<\/p>\r\n\r\n<div id=\"fs-idp13823680\">[latex]\\begin{array}{rcl}\\text{Quantity supplied of financial capital}&amp; \\text{ = }&amp; \\text{Quantity demanded of financial capital}\\\\ \\text{(T - G) + (M - X) + S}&amp; \\text{ = }&amp; \\text{I}\\end{array}[\/latex]<\/div>\r\n<p id=\"eip-id1168278738018\">Recall from The Macroeconomic Perspective that<\/p>\r\n\r\n<div id=\"eip-id1168278898840\">[latex]\\text{Nominal GDP = Price Level (or GDP Deflator) \\times Real GDP.}[\/latex]<\/div>\r\n<p id=\"eip-id1168268368833\">Therefore,<\/p>\r\n\r\n<div id=\"eip-id1168269394336\">[latex]\\text{Money Supply \\times velocity = Nominal GDP = Price Level \\times Real GDP.}[\/latex]<\/div>\r\n<p id=\"fs-idm76022928\">We sometimes call this equation the basic quantity equation of money but, as you can see, it is just the definition of velocity written in a different form. This equation must hold true, by definition.<\/p>\r\n<p id=\"fs-idm139942528\">If velocity is constant over time, then a certain percentage rise in the money supply on the left-hand side of the basic quantity equation of money will inevitably lead to the same percentage rise in <span class=\"no-emphasis\">nominal GDP<\/span>\u2014although this change could happen through an increase in inflation, or an increase in <span class=\"no-emphasis\">real GDP<\/span>, or some combination of the two. If velocity is changing over time but in a constant and predictable way, then changes in the money supply will continue to have a predictable effect on nominal GDP. If velocity changes unpredictably over time, however, then the effect of changes in the money supply on nominal GDP becomes unpredictable.<\/p>\r\n<p id=\"fs-idm118722928\"><a class=\"autogenerated-content\" href=\"#CNX_Econv1-2_C28_11\">[link]<\/a> illustrates the actual velocity of money in the U.S. economy as measured by using<strong> M1<\/strong>, the most common definition of the money supply. From 1960 up to about 1980, velocity appears fairly predictable; that is, it is increasing at a fairly constant rate. In the early 1980s, however, velocity as calculated with M1 becomes more variable. The reasons for these sharp changes in velocity remain a puzzle. Economists suspect that the changes in velocity are related to innovations in banking and finance which have changed how we are using money in making economic transactions: for example, the growth of electronic payments; a rise in personal borrowing and credit card usage; and accounts that make it easier for people to hold money in savings accounts, where it is counted as M2, right up to the moment that they want to write a check on the money and transfer it to M1. So far at least, it has proven difficult to draw clear links between these kinds of factors and the specific up-and-down fluctuations in M1. Given many changes in banking and the prevalence of electronic banking, economists now favor <strong><span class=\"no-emphasis\">M2<\/span> <\/strong>as a measure of money rather than the narrower M1.<\/p>\r\n\r\n<figure id=\"CNX_Econv1-2_C28_11\">\r\n\r\n[caption id=\"\" align=\"aligncenter\" width=\"589\"]<img src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3165\/2018\/04\/05012000\/CNX_Econv1-2_C28_11.jpg\" alt=\"This graph shows the velocity of money increasing over time.\" width=\"589\" height=\"277\" \/> <strong>Velocity Calculated Using M1.\u00a0<\/strong>Velocity is the nominal GDP divided by the money supply for a given year. We can calculate different measures of velocity by using different measures of the money supply. Velocity, as calculated by using M1, has lacked a steady trend since the 1980s, instead bouncing up and down. (credit: Federal Reserve Bank of St. Louis)[\/caption]<\/figure>\r\n<p id=\"fs-idm125181904\">In the 1970s, when velocity as measured by M1 seemed predictable, a number of economists, led by Nobel laureate <strong><span class=\"no-emphasis\">Milton Friedman<\/span><\/strong> (1912\u20132006), argued that the best monetary policy was for the central bank to increase the money supply at a constant growth rate. These economists argued that with the long and variable lags of monetary policy, and the political pressures on central bankers, central bank monetary policies were as likely to have undesirable as to have desirable effects. Thus, these economists believed that the monetary policy should seek steady growth in the money supply of 3% per year. They argued that a steady monetary growth rate would be correct over longer time periods, since it would roughly match the growth of the real economy. In addition, they argued that giving the central bank less discretion to conduct monetary policy would prevent an overly activist central bank from becoming a source of economic instability and uncertainty. In this spirit, Friedman wrote in 1967: \"The first and most important lesson that history teaches about what monetary policy can do\u2014and it is a lesson of the most profound importance\u2014is that monetary policy can prevent money itself from being a major source of economic disturbance.\"<\/p>\r\n<p id=\"fs-idp37215232\">As the velocity of M1 began to fluctuate in the 1980s, having the money supply grow at a predetermined and unchanging rate seemed less desirable, because as the quantity theory of money shows, the combination of constant growth in the money supply and fluctuating velocity would cause nominal GDP to rise and fall in unpredictable ways. The jumpiness of velocity in the 1980s caused many central banks to focus less on the rate at which the quantity of money in the economy was increasing, and instead to set monetary policy by reacting to whether the economy was experiencing or in danger of higher inflation or unemployment.<\/p>\r\n\r\n<\/section><section id=\"fs-idm31056528\">\r\n<h3>Unemployment and Inflation<\/h3>\r\n<p id=\"fs-idm82678640\">If you were to survey central bankers around the world and ask them what they believe should be the primary task of monetary policy, the most popular answer by far would be fighting inflation. Most central bankers believe that the <strong>neoclassical model<\/strong> of economics accurately represents the economy over the medium to long term. Remember that in the <span class=\"no-emphasis\">neoclassical model<\/span> of the economy, we draw the aggregate supply curve as a vertical line at the level of potential GDP, as <a class=\"autogenerated-content\" href=\"#CNX_Econ_C28_009\">[link]<\/a> shows. In the neoclassical model, economists determine the level of potential GDP (and the natural rate of unemployment that exists when the economy is producing at potential GDP) by real economic factors. If the original level of <span class=\"no-emphasis\">aggregate demand<\/span> is AD<sub>0<\/sub>, then an expansionary monetary policy that shifts <strong>aggregate demand<\/strong> to AD<sub>1<\/sub> only creates an inflationary increase in the price level, but it does not alter GDP or unemployment. From this perspective, all that monetary policy can do is to lead to low inflation or high inflation\u2014and low inflation provides a better climate for a healthy and growing economy. After all, low inflation means that businesses making investments can focus on real economic issues, not on figuring out ways to protect themselves from the costs and risks of inflation. In this way, a consistent pattern of low inflation can contribute to long-term growth.<\/p>\r\n\r\n<figure id=\"CNX_Econ_C28_009\">\r\n\r\n[caption id=\"\" align=\"aligncenter\" width=\"390\"]<img src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3165\/2018\/04\/05012007\/CNX_Econ_C28_009.jpg\" alt=\"This graph shows the neo-classical view that in the long run, monetary policy only affects the price level, not output.\" width=\"390\" height=\"254\" \/> Monetary Policy in a Neoclassical Model.\u00a0In a neoclassical view, monetary policy affects only the price level, not the level of output in the economy. For example, an expansionary monetary policy causes aggregate demand to shift from the original AD0 to AD1. However, the adjustment of the economy from the original equilibrium (E0) to the new equilibrium (E1) represents an inflationary increase in the price level from P0 to P1, but has no effect in the long run on output or the unemployment rate. In fact, no shift in AD will affect the equilibrium quantity of output in this model.[\/caption]<\/figure>\r\n<p id=\"fs-idp59740704\">This vision of focusing monetary policy on a low rate of inflation is so attractive that many countries have rewritten their central banking laws since in the 1990s to have their bank practice <strong>inflation targeting<\/strong>, which means that the central bank is legally required to focus primarily on keeping inflation low. By 2014, central banks in 28 countries, including Austria, Brazil, Canada, Israel, Korea, Mexico, New Zealand, Spain, Sweden, Thailand, and the United Kingdom faced a legal requirement to target the inflation rate. A notable exception is the <strong><span class=\"no-emphasis\">Federal Reserve<\/span><\/strong> in the United States, which does not practice inflation-targeting. Instead, the law governing the Federal Reserve requires it to take both unemployment and inflation into account.<\/p>\r\n<p id=\"fs-idp118337584\">Economists have no final consensus on whether a central bank should be required to focus only on inflation or should have greater discretion. For those who subscribe to the inflation targeting philosophy, the fear is that politicians who are worried about slow economic growth and unemployment will constantly pressure the central bank to conduct a loose monetary policy\u2014even if the economy is already producing at <strong><span class=\"no-emphasis\">potential GDP<\/span>.<\/strong> In some countries, the central bank may lack the political power to resist such pressures, with the result of higher inflation, but no long-term reduction in unemployment. The U.S. Federal Reserve has a tradition of independence, but central banks in other countries may be under greater political pressure. For all of these reasons\u2014long and variable lags, excess reserves, unstable velocity, and controversy over economic goals\u2014monetary policy in the real world is often difficult. The basic message remains, however, that central banks can affect aggregate demand through the conduct of monetary policy and in that way influence macroeconomic outcomes.<\/p>\r\n\r\n<\/section><section id=\"fs-idp197515408\">\r\n<h3>Asset Bubbles and Leverage Cycles<\/h3>\r\n<p id=\"fs-idp177908240\">One long-standing concern about having the central bank focus on inflation and unemployment is that it may be overlooking certain other economic problems that are coming in the future. For example, from 1994 to 2000 during what was known as the \"dot-com\" boom, the U.S. stock market, which the <strong><span class=\"no-emphasis\">Dow Jones<\/span> <\/strong>Industrial Index measures (which includes 30 very large companies from across the U.S. economy), nearly tripled in value. The <strong><span class=\"no-emphasis\">Nasdaq<\/span> <\/strong>index, which includes many smaller technology companies, increased in value by a multiple of five from 1994 to 2000. These rates of increase were clearly not sustainable. Stock values as measured by the Dow Jones were almost 20% lower in 2009 than they had been in 2000. Stock values in the Nasdaq index were 50% lower in 2009 than they had been in 2000. The drop-off in stock market values contributed to the 2001 recession and the higher unemployment that followed.<\/p>\r\n<p id=\"fs-idp42534240\">We can tell a similar story about housing prices in the mid-2000s. During the 1970s, 1980s, and 1990s, housing prices increased at about 6% per year on average. During what came to be known as the \"housing bubble\" from 2003 to 2005, housing prices increased at almost double this annual rate. These rates of increase were clearly not sustainable. When housing prices fell in 2007 and 2008, many banks and households found that their assets were worth less than they expected, which contributed to the recession that started in 2007.<\/p>\r\n<p id=\"fs-idp52482080\">At a broader level, some economists worry about a<strong> <span class=\"no-emphasis\">leverage cycle<\/span><\/strong>, where \"leverage\" is a term financial economists use to mean \"borrowing.\" When economic times are good, banks and the financial sector are eager to lend, and people and firms are eager to borrow. Remember that a <strong><span class=\"no-emphasis\">money multiplier<\/span><\/strong> determines the amount of money and credit in an economy \u2014a process of loans made, money deposited, and more loans made. In good economic times, this surge of lending exaggerates the episode of economic growth. It can even be part of what lead prices of certain assets\u2014like stock prices or housing prices\u2014to rise at unsustainably high annual rates. At some point, when economic times turn bad, banks and the financial sector become much less willing to lend, and credit becomes expensive or unavailable to many potential borrowers. The sharp reduction in credit, perhaps combined with the deflating prices of a dot-com stock price bubble or a housing bubble, makes the economic downturn worse than it would otherwise be.<\/p>\r\n<p id=\"fs-idp169318352\">Thus, some economists have suggested that the central bank should not just look at economic growth, inflation, and unemployment rates, but should also keep an eye on asset prices and leverage cycles. Such proposals are quite controversial. If a central bank had announced in 1997 that stock prices were rising \"too fast\" or in 2004 that housing prices were rising \"too fast,\" and then taken action to hold down price increases, many people and their elected political representatives would have been outraged. Neither the Federal Reserve nor any other central banks want to take the responsibility of deciding when stock prices and housing prices are too high, too low, or just right. As further research explores how asset price bubbles and leverage cycles can affect an economy, central banks may need to think about whether they should conduct monetary policy in a way that would seek to moderate these effects.<\/p>\r\n<p id=\"fs-idp52934464\">Let\u2019s end this chapter with a Work it Out exercise in how the Fed\u2014or any central bank\u2014would stir up the economy by increasing the money supply.<\/p>\r\n\r\n<div id=\"fs-idm124315312\" class=\"economics workout\">\r\n<div>\r\n<div class=\"textbox shaded\">\r\n<div id=\"fs-idm124315312\" class=\"economics workout\">\r\n<h3>Calculating the Effects of Monetary Stimulus<\/h3>\r\n<p id=\"fs-idm83489088\">Suppose that the central bank wants to stimulate the economy by increasing the money supply. The bankers estimate that the velocity of money is 3, and that the price level will increase from 100 to 110 due to the stimulus. Using the quantity equation of money, what will be the impact of an $800 billion dollar increase in the money supply on the quantity of goods and services in the economy given an initial money supply of $4 trillion?<\/p>\r\n<p id=\"fs-idm75994192\">Step 1. We begin by writing the quantity equation of money: MV = PQ. We know that initially V = 3, M = 4,000 (billion) and P = 100. Substituting these numbers in, we can solve for Q:<\/p>\r\n\r\n<div id=\"fs-idm333744\">[latex]\\begin{array}{rcl}\\text{MV}&amp; \\text{ = }&amp; \\text{PQ}\\\\ \\text{4,000 \\times 3}&amp; \\text{ = }&amp; \\text{100 \\times Q}\\\\ \\text{Q}&amp; \\text{ = }&amp; \\text{120}\\end{array}[\/latex]<\/div>\r\n<p id=\"fs-idm14243472\">Step 2. Now we want to find the effect of the addition $800 billion in the money supply, together with the increase in the price level. The new equation is:<\/p>\r\n\r\n<div id=\"fs-idp283504\">[latex]\\begin{array}{rcl}\\text{MV}&amp; \\text{ = }&amp; \\text{PQ}\\\\ \\text{4,800 \\times 3}&amp; \\text{ = }&amp; \\text{110 \\times Q}\\\\ \\text{Q}&amp; \\text{ = }&amp; \\text{130.9}\\end{array}[\/latex]<\/div>\r\n<p id=\"fs-idm100511536\">Step 3. If we take the difference between the two quantities, we find that the monetary stimulus increased the quantity of goods and services in the economy by 10.9 billion.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<span style=\"font-size: 1rem;text-align: initial\">The discussion in this chapter has focused on domestic monetary policy; that is, the view of monetary policy within an economy. Exchange Rates and International Capital Flows explores the international dimension of monetary policy, and how monetary policy becomes involved with <\/span><span class=\"no-emphasis\" style=\"font-size: 1rem;text-align: initial\">exchange rates<\/span><span style=\"font-size: 1rem;text-align: initial\"> and international flows of <\/span><span class=\"no-emphasis\" style=\"font-size: 1rem;text-align: initial\">financial capital<\/span><span style=\"font-size: 1rem;text-align: initial\">.<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"fs-idp12365104\" class=\"economics bringhome\">\r\n<div>\r\n<div class=\"textbox shaded\"><section id=\"fs-idp197515408\">\r\n<div id=\"fs-idp12365104\" class=\"economics bringhome\">\r\n<h3>The Problem of the Zero Percent Interest Rate Lower Bound<\/h3>\r\n<p id=\"fs-idp145260208\">In 2008, the U.S. Federal Reserve found itself in a difficult position. The federal funds rate was on its way to near zero, which meant that traditional open market operations, by which the Fed purchases U.S. Treasury Bills to lower short term interest rates, was no longer viable. This so called \"zero bound problem,\" prompted the Fed, under then Chair Ben Bernanke, to attempt some unconventional policies, collectively called quantitative easing. By early 2014, quantitative easing nearly quintupled the amount of bank reserves. This likely contributed to the U.S. economy\u2019s recovery, but the impact was muted, probably due to some of the hurdles mentioned in the last section of this module. The unprecedented increase in bank reserves also led to fears of inflation. As of early 2015, however, there have been no serious signs of a boom, with core inflation around a stable 1.7%.<\/p>\r\n\r\n<\/div>\r\n<\/section><\/div>\r\n<div class=\"textbox key-takeaways\">\r\n<h3><span style=\"font-size: 1em;font-weight: 600\">Key Concepts and Summary<\/span><\/h3>\r\n<section id=\"fs-idm54704640\" class=\"summary\">\r\n<p id=\"fs-idm132262144\">Monetary policy is inevitably imprecise, for a number of reasons: (a) the effects occur only after long and variable lags; (b) if banks decide to hold excess reserves, monetary policy cannot force them to lend; and (c) velocity may shift in unpredictable ways. The basic quantity equation of money is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real output of the economy. Some central banks, like the European Central Bank, practice inflation targeting, which means that the only goal of the central bank is to keep inflation within a low target range. Other central banks, such as the U.S. Federal Reserve, are free to focus on either reducing inflation or stimulating an economy that is in recession, whichever goal seems most important at the time.<\/p>\r\n\r\n<\/section><\/div>\r\n<\/div>\r\n<\/div>\r\n<\/section><section id=\"fs-idm96604176\" class=\"self-check-questions\">\r\n<div class=\"textbox exercises\"><section id=\"fs-idm96604176\" class=\"self-check-questions\">\r\n<h3>Self-Check Questions<\/h3>\r\n<div id=\"fs-idm58034224\">\r\n<div id=\"fs-idm16996976\">\r\n<p id=\"fs-idm123133024\">Why might banks want to hold excess reserves in time of recession?<\/p>\r\n\r\n<\/div>\r\n<div id=\"fs-idm78605808\">\r\n<p id=\"fs-idm114752256\">In times of economic uncertainty, banks may worry that borrowers will lose the ability to repay their loans. They may also fear that a panic is more likely and they will need the excess reserves to meet their obligations.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"fs-idm21037184\">\r\n<div id=\"fs-idm108071104\">\r\n<p id=\"fs-idm36172688\">Why might the velocity of money change unexpectedly?<\/p>\r\n\r\n<\/div>\r\n<div id=\"fs-idm108809792\">\r\n<p id=\"fs-idm38291728\">If consumer optimism changes, spending can speed up or slow down. This could also happen in a case where consumers need to buy a large number of items quickly, such as in a situation of national emergency.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/section><section id=\"fs-idm18385072\" class=\"review-questions\">\r\n<h3>Review Questions<\/h3>\r\n<div id=\"fs-idp50981888\">\r\n<div id=\"fs-idm64476576\">\r\n<p id=\"fs-idm73302848\">Which kind of monetary policy would you expect in response to recession: expansionary or contractionary? Why?<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"fs-idm16694608\">\r\n<div id=\"fs-idm16883776\">\r\n<p id=\"fs-idp87394608\">How might each of the following factors complicate the implementation of monetary policy: long and variable lags, excess reserves, and movements in velocity?<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"fs-idm7202640\">\r\n<div id=\"fs-idm57423232\">\r\n<p id=\"fs-idm75606976\">Define the velocity of the money supply.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"fs-idm58096688\">\r\n<div id=\"fs-idp21420832\">\r\n<p id=\"fs-idm94656304\">What is the basic quantity equation of money?<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"fs-idm30131184\">\r\n<div id=\"fs-idm50304816\">\r\n<p id=\"fs-idp2044608\">How does a monetary policy of inflation target work?<\/p>\r\n&nbsp;\r\n\r\n<\/div>\r\n<\/div>\r\n<\/section><section id=\"fs-idm45302736\" class=\"critical-thinking\">\r\n<h3>Critical Thinking Questions<\/h3>\r\n<div id=\"fs-idm78098992\">\r\n<div id=\"fs-idm134363936\">\r\n<p id=\"fs-idm131230352\">How does rule-based monetary policy differ from discretionary monetary policy (that is, monetary policy not based on a rule)? What are some of the arguments for each?<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"fs-idm19792992\">\r\n<div id=\"fs-idm247506544\">\r\n<p id=\"fs-idm117461536\">Is it preferable for central banks to primarily target inflation or unemployment? Why?<\/p>\r\n&nbsp;\r\n\r\n<\/div>\r\n<\/div>\r\n<\/section><section id=\"fs-idm55296304\" class=\"problems\">\r\n<h3>Problems<\/h3>\r\n<div id=\"fs-idm65596656\">\r\n<div id=\"fs-idm101382176\">\r\n<p id=\"fs-idm109286832\">All other things being equal, by how much will nominal GDP expand if the central bank increases the money supply by $100 billion, and the velocity of money is 3? (Use this information as necessary to answer the following 4 questions.)<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"fs-idm11787872\">\r\n<div id=\"fs-idm36564224\">\r\n<p id=\"fs-idm132333648\">Suppose now that economists expect the velocity of money to increase by 50% as a result of the monetary stimulus. What will be the total increase in nominal GDP?<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"fs-idm72440320\">\r\n<div id=\"fs-idm20549280\">\r\n<p id=\"fs-idp11808496\">If GDP is 1,500 and the money supply is 400, what is velocity?<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"fs-idm96289520\">\r\n<div id=\"fs-idm57241968\">\r\n<p id=\"fs-idp18411296\">If GDP now rises to 1,600, but the money supply does not change, how has velocity changed?<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"fs-idm55473152\">\r\n<div id=\"fs-idm123033536\">\r\n<p id=\"fs-idm99647056\">If GDP now falls back to 1,500 and the money supply falls to 350, what is velocity?<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/section><\/div>\r\n<\/section><section id=\"fs-idm94381152\" class=\"references\">\r\n<h3>References<\/h3>\r\n<p id=\"fs-idm1837520\">Tobin, James. \"The Concise Encyclopedia of Economics: Monetary Policy.\" <em>Library of Economics and Liberty<\/em>. Accessed November 2013. http:\/\/www.econlib.org\/library\/Enc\/MonetaryPolicy.html.<\/p>\r\n<p id=\"fs-idm110654720\">Federal Reserve Bank of New York. \"The Founding of the Fed.\" Accessed November 2013. http:\/\/www.newyorkfed.org\/aboutthefed\/history_article.html.<\/p>\r\n\r\n<\/section>\r\n<div>\r\n<div class=\"textbox shaded\">\r\n<h3>Glossary<\/h3>\r\n<dl id=\"fs-idm169011568\">\r\n \t<dt>basic quantity equation of money<\/dt>\r\n \t<dd id=\"fs-idm129666416\">money supply \u00d7 velocity = nominal GDP<\/dd>\r\n<\/dl>\r\n<dl id=\"fs-idm36890848\">\r\n \t<dt>excess reserves<\/dt>\r\n \t<dd id=\"fs-idm110200448\">reserves banks hold that exceed the legally mandated limit<\/dd>\r\n<\/dl>\r\n<dl id=\"fs-idm163533680\">\r\n \t<dt>inflation targeting<\/dt>\r\n \t<dd id=\"fs-idm163189680\">a rule that the central bank is required to focus only on keeping inflation low<\/dd>\r\n<\/dl>\r\n<dl id=\"fs-idm41906160\">\r\n \t<dt>velocity<\/dt>\r\n \t<dd id=\"fs-idm70648288\">the speed with which money circulates through the economy; calculated as the nominal GDP divided by the money supply<span style=\"font-size: 1rem;text-align: initial\">\u00a0<\/span><\/dd>\r\n<\/dl>\r\n<\/div>\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Objectives<\/h3>\n<p>By the end of this section, you will be able to:<\/p>\n<ul>\n<li>Analyze whether monetary policy decisions should be made more democratically<\/li>\n<li>Calculate the velocity of money<\/li>\n<li>Evaluate the central bank\u2019s influence on inflation, unemployment, asset bubbles, and leverage cycles<\/li>\n<li>Calculate the effects of monetary stimulus<\/li>\n<\/ul>\n<\/div>\n<p id=\"fs-idp7647456\">In the real world, effective monetary policy faces a number of significant hurdles. Monetary policy affects the economy only after a time lag that is typically long and of variable length. Remember, monetary policy involves a chain of events: the <strong><span class=\"no-emphasis\">central bank<\/span><\/strong> must perceive a situation in the economy, hold a meeting, and make a decision to react by tightening or loosening monetary policy. The change in monetary policy must percolate through the banking system, changing the quantity of loans and affecting interest rates. When interest rates change, businesses must change their investment levels and consumers must change their borrowing patterns when purchasing homes or cars. Then it takes time for these changes to filter through the rest of the economy.<\/p>\n<p id=\"fs-idp433616\">As a result of this chain of events, monetary policy has little effect in the immediate future. Instead, its primary effects are felt perhaps one to three years in the future. The reality of long and variable time lags does not mean that a central bank should refuse to make decisions. It does mean that central banks should be humble about taking action, because of the risk that their actions can create as much or more economic instability as they resolve.<\/p>\n<section id=\"fs-idp33604816\">\n<h3>Excess Reserves<\/h3>\n<p id=\"fs-idp81377104\">Banks are legally required to hold a minimum level of reserves, but no rule prohibits them from holding additional <strong>excess reserves<\/strong> above the legally mandated limit. For example, during a recession banks may be hesitant to lend, because they fear that when the economy is contracting, a high proportion of loan applicants become less likely to repay their loans.<\/p>\n<p id=\"fs-idm43462128\">When many banks are choosing to hold excess reserves, expansionary monetary policy may not work well. This may occur because the banks are concerned about a deteriorating economy, while the central bank is trying to expand the money supply. If the banks prefer to hold excess reserves above the legally required level, the central bank cannot force individual banks to make loans. Similarly, sensible businesses and consumers may be reluctant to borrow substantial amounts of money in a <strong><span class=\"no-emphasis\">recession<\/span>,<\/strong> because they recognize that firms\u2019 sales and employees\u2019 jobs are more insecure in a recession, and they do not want to face the need to make interest payments. The result is that during an especially deep recession, an expansionary monetary policy may have little effect on either the price level or the <strong><span class=\"no-emphasis\">real GDP<\/span>.<\/strong><\/p>\n<p id=\"fs-idp81069616\">Japan experienced this situation in the 1990s and early 2000s. Japan\u2019s economy entered a period of very slow growth, dipping in and out of recession, in the early 1990s. By February 1999, the Bank of Japan had lowered the equivalent of its federal funds rate to 0%. It kept it there most of the time through 2003. Moreover, in the two years from March 2001 to March 2003, the Bank of Japan also expanded the country&#8217;s money supply by about 50%\u2014an enormous increase. Even this highly expansionary monetary policy, however, had no substantial effect on stimulating aggregate demand. Japan\u2019s economy continued to experience extremely slow growth into the mid-2000s.<\/p>\n<div id=\"fs-idp84692480\" class=\"economics clearup\">\n<div>\n<div class=\"textbox shaded\">\n<div id=\"fs-idp84692480\" class=\"economics clearup\">\n<h3>Should monetary policy decisions be made more democratically?<\/h3>\n<p id=\"fs-idp76150864\">Should a nation\u2019s Congress or legislature comprised of elected representatives conduct monetary policy or should a politically appointed central bank that is more independent of voters take charge? Here are some of the arguments.<\/p>\n<p id=\"fs-idp7939024\"><em>The Case for Greater Democratic Control of Monetary Policy<\/em><\/p>\n<p id=\"fs-idp85348880\">Elected representatives pass taxes and spending bills to conduct fiscal policy by passing tax and spending bills. They could handle monetary policy in the same way. They will sometimes make mistakes, but in a democracy, it is better to have elected officials who are accountable to voters make mistakes instead of political appointees. After all, the people appointed to the top governing positions at the Federal Reserve\u2014and to most central banks around the world\u2014are typically bankers and economists. They are not representatives of borrowers like small businesses or farmers nor are they representatives of labor unions. Central banks might not be so quick to raise interest rates if they had to pay more attention to firms and people in the real economy.<\/p>\n<p id=\"fs-idp50453696\"><em>The Case for an Independent Central Bank<\/em><\/p>\n<p id=\"fs-idp43911792\">Because the central bank has some insulation from day-to-day politics, its members can take a nonpartisan look at specific economic situations and make tough, immediate decisions when necessary. The idea of giving a legislature the ability to create money and hand out loans is likely to end up badly, sooner or later. It is simply too tempting for lawmakers to expand the money supply to fund their projects. The long term result will be rampant inflation. Also, a central bank, acting according to the laws passed by elected officials, can respond far more quickly than a legislature. For example, the U.S. budget takes months to debate, pass, and sign into law, but monetary policy decisions happen much more rapidly. Day-to-day democratic control of monetary policy is impractical and seems likely to lead to an overly expansionary monetary policy and higher inflation.<\/p>\n<\/div>\n<\/div>\n<p><span style=\"font-size: 1rem;text-align: initial\">The problem of excess reserves does not affect contractionary policy. Central bankers have an old saying that monetary policy can be like pulling and pushing on a string: when the central bank pulls on the string and uses contractionary monetary policy, it can definitely raise interest rates and reduce aggregate demand. However, when the central bank tries to push on the string of expansionary monetary policy, the string may sometimes just fold up limp and have little effect, because banks decide not to loan out their excess reserves. Do not take this analogy too literally\u2014expansionary monetary policy usually does have real effects, after that inconveniently long and variable lag. There are also times, like Japan\u2019s economy in the late 1990s and early 2000s, when expansionary monetary policy has been insufficient to lift a recession-prone economy.<\/span><\/p>\n<\/div>\n<\/div>\n<\/section>\n<section id=\"fs-idp108933952\">\n<h3>Unpredictable Movements of Velocity<\/h3>\n<p id=\"fs-idp120217808\">Velocity is a term that economists use to describe how quickly money circulates through the economy. We define the velocity of money in a year as:<\/p>\n<div id=\"fs-idp27763056\">[latex]\\begin{array}{rcl}\\text{Velocity}& \\text{ = }& \\frac{\\text{nominal GDP}}{\\text{money supply}}\\end{array}[\/latex]<\/div>\n<p id=\"fs-idp129550576\">Specific measurements of velocity depend on the definition of the money supply used. Consider the velocity of <span class=\"no-emphasis\">M1<\/span>, the total amount of currency in circulation and checking account balances. In 2009, for example, M1 was $1.7 trillion and nominal GDP was $14.3 trillion, so the velocity of M1 was 8.4 ($14.3 trillion\/$1.7 trillion). A higher velocity of money means that the average dollar circulates more times in a year. A lower velocity means that the average dollar circulates fewer times in a year.<\/p>\n<p id=\"fs-idp101875056\">See the following Clear It Up feature for a discussion of how deflation could affect monetary policy.<\/p>\n<div id=\"fs-idp53473568\" class=\"economics clearup\">\n<div>\n<div class=\"textbox shaded\">\n<h3>What happens during episodes of deflation?<\/h3>\n<p id=\"fs-idp111366880\"><span class=\"no-emphasis\">Deflation<\/span> occurs when the rate of inflation is negative; that is, instead of money having less purchasing power over time, as occurs with inflation, money is worth more. Deflation can make it very difficult for monetary policy to address a recession.<\/p>\n<p id=\"fs-idp166665632\">Remember that the real interest rate is the nominal interest rate minus the rate of inflation. If the <span class=\"no-emphasis\">nominal interest rate<\/span> is 7% and the rate of inflation is 3%, then the borrower is effectively paying a 4% real interest rate. If the nominal interest rate is 7% and there is <em>deflation<\/em> of 2%, then the real interest rate is actually 9%. In this way, an unexpected deflation raises the real interest payments for borrowers. It can lead to a situation where borrowers do not repay an unexpectedly high number of loans, and banks find that their net worth is decreasing or negative. When banks are suffering losses, they become less able and eager to make new loans. Aggregate demand declines, which can lead to recession.<\/p>\n<p id=\"fs-idp6287984\">Then the double-whammy: After causing a recession, deflation can make it difficult for monetary policy to work. Say that the central bank uses expansionary monetary policy to reduce the nominal interest rate all the way to zero\u2014but the economy has 5% deflation. As a result, the real interest rate is 5%, and because a central bank cannot make the nominal interest rate negative, expansionary policy cannot reduce the real interest rate further.<\/p>\n<p id=\"fs-idp129033200\">In the U.S. economy during the early 1930s, deflation was 6.7% per year from 1930\u20131933, which caused many borrowers to default on their loans and many banks to end up bankrupt, which in turn contributed substantially to the Great Depression. Not all episodes of deflation, however, end in economic depression. Japan, for example, experienced deflation of slightly less than 1% per year from 1999\u20132002, which hurt the Japanese economy, but it still grew by about 0.9% per year over this period. There is at least one historical example of deflation coexisting with rapid growth. The U.S. economy experienced deflation of about 1.1% per year over the quarter-century from 1876\u20131900, but real GDP also expanded at a rapid clip of 4% per year over this time, despite some occasional severe recessions.<\/p>\n<p id=\"fs-idp172318016\">The central bank should be on guard against deflation and, if necessary, use expansionary monetary policy to prevent any long-lasting or extreme deflation from occurring. Except in severe cases like the Great Depression, deflation does not guarantee economic disaster.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<p id=\"fs-idm73105584\">Changes in velocity can cause problems for monetary policy. To understand why, rewrite the definition of velocity so that the money supply is on the left-hand side of the equation. That is:<\/p>\n<div id=\"fs-idp13823680\">[latex]\\begin{array}{rcl}\\text{Quantity supplied of financial capital}& \\text{ = }& \\text{Quantity demanded of financial capital}\\\\ \\text{(T - G) + (M - X) + S}& \\text{ = }& \\text{I}\\end{array}[\/latex]<\/div>\n<p id=\"eip-id1168278738018\">Recall from The Macroeconomic Perspective that<\/p>\n<div id=\"eip-id1168278898840\">[latex]\\text{Nominal GDP = Price Level (or GDP Deflator) \\times Real GDP.}[\/latex]<\/div>\n<p id=\"eip-id1168268368833\">Therefore,<\/p>\n<div id=\"eip-id1168269394336\">[latex]\\text{Money Supply \\times velocity = Nominal GDP = Price Level \\times Real GDP.}[\/latex]<\/div>\n<p id=\"fs-idm76022928\">We sometimes call this equation the basic quantity equation of money but, as you can see, it is just the definition of velocity written in a different form. This equation must hold true, by definition.<\/p>\n<p id=\"fs-idm139942528\">If velocity is constant over time, then a certain percentage rise in the money supply on the left-hand side of the basic quantity equation of money will inevitably lead to the same percentage rise in <span class=\"no-emphasis\">nominal GDP<\/span>\u2014although this change could happen through an increase in inflation, or an increase in <span class=\"no-emphasis\">real GDP<\/span>, or some combination of the two. If velocity is changing over time but in a constant and predictable way, then changes in the money supply will continue to have a predictable effect on nominal GDP. If velocity changes unpredictably over time, however, then the effect of changes in the money supply on nominal GDP becomes unpredictable.<\/p>\n<p id=\"fs-idm118722928\"><a class=\"autogenerated-content\" href=\"#CNX_Econv1-2_C28_11\">[link]<\/a> illustrates the actual velocity of money in the U.S. economy as measured by using<strong> M1<\/strong>, the most common definition of the money supply. From 1960 up to about 1980, velocity appears fairly predictable; that is, it is increasing at a fairly constant rate. In the early 1980s, however, velocity as calculated with M1 becomes more variable. The reasons for these sharp changes in velocity remain a puzzle. Economists suspect that the changes in velocity are related to innovations in banking and finance which have changed how we are using money in making economic transactions: for example, the growth of electronic payments; a rise in personal borrowing and credit card usage; and accounts that make it easier for people to hold money in savings accounts, where it is counted as M2, right up to the moment that they want to write a check on the money and transfer it to M1. So far at least, it has proven difficult to draw clear links between these kinds of factors and the specific up-and-down fluctuations in M1. Given many changes in banking and the prevalence of electronic banking, economists now favor <strong><span class=\"no-emphasis\">M2<\/span> <\/strong>as a measure of money rather than the narrower M1.<\/p>\n<figure id=\"CNX_Econv1-2_C28_11\">\n<div style=\"width: 599px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3165\/2018\/04\/05012000\/CNX_Econv1-2_C28_11.jpg\" alt=\"This graph shows the velocity of money increasing over time.\" width=\"589\" height=\"277\" \/><\/p>\n<p class=\"wp-caption-text\"><strong>Velocity Calculated Using M1.\u00a0<\/strong>Velocity is the nominal GDP divided by the money supply for a given year. We can calculate different measures of velocity by using different measures of the money supply. Velocity, as calculated by using M1, has lacked a steady trend since the 1980s, instead bouncing up and down. (credit: Federal Reserve Bank of St. Louis)<\/p>\n<\/div>\n<\/figure>\n<p id=\"fs-idm125181904\">In the 1970s, when velocity as measured by M1 seemed predictable, a number of economists, led by Nobel laureate <strong><span class=\"no-emphasis\">Milton Friedman<\/span><\/strong> (1912\u20132006), argued that the best monetary policy was for the central bank to increase the money supply at a constant growth rate. These economists argued that with the long and variable lags of monetary policy, and the political pressures on central bankers, central bank monetary policies were as likely to have undesirable as to have desirable effects. Thus, these economists believed that the monetary policy should seek steady growth in the money supply of 3% per year. They argued that a steady monetary growth rate would be correct over longer time periods, since it would roughly match the growth of the real economy. In addition, they argued that giving the central bank less discretion to conduct monetary policy would prevent an overly activist central bank from becoming a source of economic instability and uncertainty. In this spirit, Friedman wrote in 1967: &#8220;The first and most important lesson that history teaches about what monetary policy can do\u2014and it is a lesson of the most profound importance\u2014is that monetary policy can prevent money itself from being a major source of economic disturbance.&#8221;<\/p>\n<p id=\"fs-idp37215232\">As the velocity of M1 began to fluctuate in the 1980s, having the money supply grow at a predetermined and unchanging rate seemed less desirable, because as the quantity theory of money shows, the combination of constant growth in the money supply and fluctuating velocity would cause nominal GDP to rise and fall in unpredictable ways. The jumpiness of velocity in the 1980s caused many central banks to focus less on the rate at which the quantity of money in the economy was increasing, and instead to set monetary policy by reacting to whether the economy was experiencing or in danger of higher inflation or unemployment.<\/p>\n<\/section>\n<section id=\"fs-idm31056528\">\n<h3>Unemployment and Inflation<\/h3>\n<p id=\"fs-idm82678640\">If you were to survey central bankers around the world and ask them what they believe should be the primary task of monetary policy, the most popular answer by far would be fighting inflation. Most central bankers believe that the <strong>neoclassical model<\/strong> of economics accurately represents the economy over the medium to long term. Remember that in the <span class=\"no-emphasis\">neoclassical model<\/span> of the economy, we draw the aggregate supply curve as a vertical line at the level of potential GDP, as <a class=\"autogenerated-content\" href=\"#CNX_Econ_C28_009\">[link]<\/a> shows. In the neoclassical model, economists determine the level of potential GDP (and the natural rate of unemployment that exists when the economy is producing at potential GDP) by real economic factors. If the original level of <span class=\"no-emphasis\">aggregate demand<\/span> is AD<sub>0<\/sub>, then an expansionary monetary policy that shifts <strong>aggregate demand<\/strong> to AD<sub>1<\/sub> only creates an inflationary increase in the price level, but it does not alter GDP or unemployment. From this perspective, all that monetary policy can do is to lead to low inflation or high inflation\u2014and low inflation provides a better climate for a healthy and growing economy. After all, low inflation means that businesses making investments can focus on real economic issues, not on figuring out ways to protect themselves from the costs and risks of inflation. In this way, a consistent pattern of low inflation can contribute to long-term growth.<\/p>\n<figure id=\"CNX_Econ_C28_009\">\n<div style=\"width: 400px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3165\/2018\/04\/05012007\/CNX_Econ_C28_009.jpg\" alt=\"This graph shows the neo-classical view that in the long run, monetary policy only affects the price level, not output.\" width=\"390\" height=\"254\" \/><\/p>\n<p class=\"wp-caption-text\">Monetary Policy in a Neoclassical Model.\u00a0In a neoclassical view, monetary policy affects only the price level, not the level of output in the economy. For example, an expansionary monetary policy causes aggregate demand to shift from the original AD0 to AD1. However, the adjustment of the economy from the original equilibrium (E0) to the new equilibrium (E1) represents an inflationary increase in the price level from P0 to P1, but has no effect in the long run on output or the unemployment rate. In fact, no shift in AD will affect the equilibrium quantity of output in this model.<\/p>\n<\/div>\n<\/figure>\n<p id=\"fs-idp59740704\">This vision of focusing monetary policy on a low rate of inflation is so attractive that many countries have rewritten their central banking laws since in the 1990s to have their bank practice <strong>inflation targeting<\/strong>, which means that the central bank is legally required to focus primarily on keeping inflation low. By 2014, central banks in 28 countries, including Austria, Brazil, Canada, Israel, Korea, Mexico, New Zealand, Spain, Sweden, Thailand, and the United Kingdom faced a legal requirement to target the inflation rate. A notable exception is the <strong><span class=\"no-emphasis\">Federal Reserve<\/span><\/strong> in the United States, which does not practice inflation-targeting. Instead, the law governing the Federal Reserve requires it to take both unemployment and inflation into account.<\/p>\n<p id=\"fs-idp118337584\">Economists have no final consensus on whether a central bank should be required to focus only on inflation or should have greater discretion. For those who subscribe to the inflation targeting philosophy, the fear is that politicians who are worried about slow economic growth and unemployment will constantly pressure the central bank to conduct a loose monetary policy\u2014even if the economy is already producing at <strong><span class=\"no-emphasis\">potential GDP<\/span>.<\/strong> In some countries, the central bank may lack the political power to resist such pressures, with the result of higher inflation, but no long-term reduction in unemployment. The U.S. Federal Reserve has a tradition of independence, but central banks in other countries may be under greater political pressure. For all of these reasons\u2014long and variable lags, excess reserves, unstable velocity, and controversy over economic goals\u2014monetary policy in the real world is often difficult. The basic message remains, however, that central banks can affect aggregate demand through the conduct of monetary policy and in that way influence macroeconomic outcomes.<\/p>\n<\/section>\n<section id=\"fs-idp197515408\">\n<h3>Asset Bubbles and Leverage Cycles<\/h3>\n<p id=\"fs-idp177908240\">One long-standing concern about having the central bank focus on inflation and unemployment is that it may be overlooking certain other economic problems that are coming in the future. For example, from 1994 to 2000 during what was known as the &#8220;dot-com&#8221; boom, the U.S. stock market, which the <strong><span class=\"no-emphasis\">Dow Jones<\/span> <\/strong>Industrial Index measures (which includes 30 very large companies from across the U.S. economy), nearly tripled in value. The <strong><span class=\"no-emphasis\">Nasdaq<\/span> <\/strong>index, which includes many smaller technology companies, increased in value by a multiple of five from 1994 to 2000. These rates of increase were clearly not sustainable. Stock values as measured by the Dow Jones were almost 20% lower in 2009 than they had been in 2000. Stock values in the Nasdaq index were 50% lower in 2009 than they had been in 2000. The drop-off in stock market values contributed to the 2001 recession and the higher unemployment that followed.<\/p>\n<p id=\"fs-idp42534240\">We can tell a similar story about housing prices in the mid-2000s. During the 1970s, 1980s, and 1990s, housing prices increased at about 6% per year on average. During what came to be known as the &#8220;housing bubble&#8221; from 2003 to 2005, housing prices increased at almost double this annual rate. These rates of increase were clearly not sustainable. When housing prices fell in 2007 and 2008, many banks and households found that their assets were worth less than they expected, which contributed to the recession that started in 2007.<\/p>\n<p id=\"fs-idp52482080\">At a broader level, some economists worry about a<strong> <span class=\"no-emphasis\">leverage cycle<\/span><\/strong>, where &#8220;leverage&#8221; is a term financial economists use to mean &#8220;borrowing.&#8221; When economic times are good, banks and the financial sector are eager to lend, and people and firms are eager to borrow. Remember that a <strong><span class=\"no-emphasis\">money multiplier<\/span><\/strong> determines the amount of money and credit in an economy \u2014a process of loans made, money deposited, and more loans made. In good economic times, this surge of lending exaggerates the episode of economic growth. It can even be part of what lead prices of certain assets\u2014like stock prices or housing prices\u2014to rise at unsustainably high annual rates. At some point, when economic times turn bad, banks and the financial sector become much less willing to lend, and credit becomes expensive or unavailable to many potential borrowers. The sharp reduction in credit, perhaps combined with the deflating prices of a dot-com stock price bubble or a housing bubble, makes the economic downturn worse than it would otherwise be.<\/p>\n<p id=\"fs-idp169318352\">Thus, some economists have suggested that the central bank should not just look at economic growth, inflation, and unemployment rates, but should also keep an eye on asset prices and leverage cycles. Such proposals are quite controversial. If a central bank had announced in 1997 that stock prices were rising &#8220;too fast&#8221; or in 2004 that housing prices were rising &#8220;too fast,&#8221; and then taken action to hold down price increases, many people and their elected political representatives would have been outraged. Neither the Federal Reserve nor any other central banks want to take the responsibility of deciding when stock prices and housing prices are too high, too low, or just right. As further research explores how asset price bubbles and leverage cycles can affect an economy, central banks may need to think about whether they should conduct monetary policy in a way that would seek to moderate these effects.<\/p>\n<p id=\"fs-idp52934464\">Let\u2019s end this chapter with a Work it Out exercise in how the Fed\u2014or any central bank\u2014would stir up the economy by increasing the money supply.<\/p>\n<div id=\"fs-idm124315312\" class=\"economics workout\">\n<div>\n<div class=\"textbox shaded\">\n<div id=\"fs-idm124315312\" class=\"economics workout\">\n<h3>Calculating the Effects of Monetary Stimulus<\/h3>\n<p id=\"fs-idm83489088\">Suppose that the central bank wants to stimulate the economy by increasing the money supply. The bankers estimate that the velocity of money is 3, and that the price level will increase from 100 to 110 due to the stimulus. Using the quantity equation of money, what will be the impact of an $800 billion dollar increase in the money supply on the quantity of goods and services in the economy given an initial money supply of $4 trillion?<\/p>\n<p id=\"fs-idm75994192\">Step 1. We begin by writing the quantity equation of money: MV = PQ. We know that initially V = 3, M = 4,000 (billion) and P = 100. Substituting these numbers in, we can solve for Q:<\/p>\n<div id=\"fs-idm333744\">[latex]\\begin{array}{rcl}\\text{MV}& \\text{ = }& \\text{PQ}\\\\ \\text{4,000 \\times 3}& \\text{ = }& \\text{100 \\times Q}\\\\ \\text{Q}& \\text{ = }& \\text{120}\\end{array}[\/latex]<\/div>\n<p id=\"fs-idm14243472\">Step 2. Now we want to find the effect of the addition $800 billion in the money supply, together with the increase in the price level. The new equation is:<\/p>\n<div id=\"fs-idp283504\">[latex]\\begin{array}{rcl}\\text{MV}& \\text{ = }& \\text{PQ}\\\\ \\text{4,800 \\times 3}& \\text{ = }& \\text{110 \\times Q}\\\\ \\text{Q}& \\text{ = }& \\text{130.9}\\end{array}[\/latex]<\/div>\n<p id=\"fs-idm100511536\">Step 3. If we take the difference between the two quantities, we find that the monetary stimulus increased the quantity of goods and services in the economy by 10.9 billion.<\/p>\n<\/div>\n<\/div>\n<p><span style=\"font-size: 1rem;text-align: initial\">The discussion in this chapter has focused on domestic monetary policy; that is, the view of monetary policy within an economy. Exchange Rates and International Capital Flows explores the international dimension of monetary policy, and how monetary policy becomes involved with <\/span><span class=\"no-emphasis\" style=\"font-size: 1rem;text-align: initial\">exchange rates<\/span><span style=\"font-size: 1rem;text-align: initial\"> and international flows of <\/span><span class=\"no-emphasis\" style=\"font-size: 1rem;text-align: initial\">financial capital<\/span><span style=\"font-size: 1rem;text-align: initial\">.<\/span><\/p>\n<\/div>\n<\/div>\n<div id=\"fs-idp12365104\" class=\"economics bringhome\">\n<div>\n<div class=\"textbox shaded\">\n<section id=\"fs-idp197515408\">\n<div id=\"fs-idp12365104\" class=\"economics bringhome\">\n<h3>The Problem of the Zero Percent Interest Rate Lower Bound<\/h3>\n<p id=\"fs-idp145260208\">In 2008, the U.S. Federal Reserve found itself in a difficult position. The federal funds rate was on its way to near zero, which meant that traditional open market operations, by which the Fed purchases U.S. Treasury Bills to lower short term interest rates, was no longer viable. This so called &#8220;zero bound problem,&#8221; prompted the Fed, under then Chair Ben Bernanke, to attempt some unconventional policies, collectively called quantitative easing. By early 2014, quantitative easing nearly quintupled the amount of bank reserves. This likely contributed to the U.S. economy\u2019s recovery, but the impact was muted, probably due to some of the hurdles mentioned in the last section of this module. The unprecedented increase in bank reserves also led to fears of inflation. As of early 2015, however, there have been no serious signs of a boom, with core inflation around a stable 1.7%.<\/p>\n<\/div>\n<\/section>\n<\/div>\n<div class=\"textbox key-takeaways\">\n<h3><span style=\"font-size: 1em;font-weight: 600\">Key Concepts and Summary<\/span><\/h3>\n<section id=\"fs-idm54704640\" class=\"summary\">\n<p id=\"fs-idm132262144\">Monetary policy is inevitably imprecise, for a number of reasons: (a) the effects occur only after long and variable lags; (b) if banks decide to hold excess reserves, monetary policy cannot force them to lend; and (c) velocity may shift in unpredictable ways. The basic quantity equation of money is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real output of the economy. Some central banks, like the European Central Bank, practice inflation targeting, which means that the only goal of the central bank is to keep inflation within a low target range. Other central banks, such as the U.S. Federal Reserve, are free to focus on either reducing inflation or stimulating an economy that is in recession, whichever goal seems most important at the time.<\/p>\n<\/section>\n<\/div>\n<\/div>\n<\/div>\n<\/section>\n<section id=\"fs-idm96604176\" class=\"self-check-questions\">\n<div class=\"textbox exercises\">\n<section id=\"fs-idm96604176\" class=\"self-check-questions\">\n<h3>Self-Check Questions<\/h3>\n<div id=\"fs-idm58034224\">\n<div id=\"fs-idm16996976\">\n<p id=\"fs-idm123133024\">Why might banks want to hold excess reserves in time of recession?<\/p>\n<\/div>\n<div id=\"fs-idm78605808\">\n<p id=\"fs-idm114752256\">In times of economic uncertainty, banks may worry that borrowers will lose the ability to repay their loans. They may also fear that a panic is more likely and they will need the excess reserves to meet their obligations.<\/p>\n<\/div>\n<\/div>\n<div id=\"fs-idm21037184\">\n<div id=\"fs-idm108071104\">\n<p id=\"fs-idm36172688\">Why might the velocity of money change unexpectedly?<\/p>\n<\/div>\n<div id=\"fs-idm108809792\">\n<p id=\"fs-idm38291728\">If consumer optimism changes, spending can speed up or slow down. This could also happen in a case where consumers need to buy a large number of items quickly, such as in a situation of national emergency.<\/p>\n<\/div>\n<\/div>\n<\/section>\n<section id=\"fs-idm18385072\" class=\"review-questions\">\n<h3>Review Questions<\/h3>\n<div id=\"fs-idp50981888\">\n<div id=\"fs-idm64476576\">\n<p id=\"fs-idm73302848\">Which kind of monetary policy would you expect in response to recession: expansionary or contractionary? Why?<\/p>\n<\/div>\n<\/div>\n<div id=\"fs-idm16694608\">\n<div id=\"fs-idm16883776\">\n<p id=\"fs-idp87394608\">How might each of the following factors complicate the implementation of monetary policy: long and variable lags, excess reserves, and movements in velocity?<\/p>\n<\/div>\n<\/div>\n<div id=\"fs-idm7202640\">\n<div id=\"fs-idm57423232\">\n<p id=\"fs-idm75606976\">Define the velocity of the money supply.<\/p>\n<\/div>\n<\/div>\n<div id=\"fs-idm58096688\">\n<div id=\"fs-idp21420832\">\n<p id=\"fs-idm94656304\">What is the basic quantity equation of money?<\/p>\n<\/div>\n<\/div>\n<div id=\"fs-idm30131184\">\n<div id=\"fs-idm50304816\">\n<p id=\"fs-idp2044608\">How does a monetary policy of inflation target work?<\/p>\n<p>&nbsp;<\/p>\n<\/div>\n<\/div>\n<\/section>\n<section id=\"fs-idm45302736\" class=\"critical-thinking\">\n<h3>Critical Thinking Questions<\/h3>\n<div id=\"fs-idm78098992\">\n<div id=\"fs-idm134363936\">\n<p id=\"fs-idm131230352\">How does rule-based monetary policy differ from discretionary monetary policy (that is, monetary policy not based on a rule)? What are some of the arguments for each?<\/p>\n<\/div>\n<\/div>\n<div id=\"fs-idm19792992\">\n<div id=\"fs-idm247506544\">\n<p id=\"fs-idm117461536\">Is it preferable for central banks to primarily target inflation or unemployment? Why?<\/p>\n<p>&nbsp;<\/p>\n<\/div>\n<\/div>\n<\/section>\n<section id=\"fs-idm55296304\" class=\"problems\">\n<h3>Problems<\/h3>\n<div id=\"fs-idm65596656\">\n<div id=\"fs-idm101382176\">\n<p id=\"fs-idm109286832\">All other things being equal, by how much will nominal GDP expand if the central bank increases the money supply by $100 billion, and the velocity of money is 3? (Use this information as necessary to answer the following 4 questions.)<\/p>\n<\/div>\n<\/div>\n<div id=\"fs-idm11787872\">\n<div id=\"fs-idm36564224\">\n<p id=\"fs-idm132333648\">Suppose now that economists expect the velocity of money to increase by 50% as a result of the monetary stimulus. What will be the total increase in nominal GDP?<\/p>\n<\/div>\n<\/div>\n<div id=\"fs-idm72440320\">\n<div id=\"fs-idm20549280\">\n<p id=\"fs-idp11808496\">If GDP is 1,500 and the money supply is 400, what is velocity?<\/p>\n<\/div>\n<\/div>\n<div id=\"fs-idm96289520\">\n<div id=\"fs-idm57241968\">\n<p id=\"fs-idp18411296\">If GDP now rises to 1,600, but the money supply does not change, how has velocity changed?<\/p>\n<\/div>\n<\/div>\n<div id=\"fs-idm55473152\">\n<div id=\"fs-idm123033536\">\n<p id=\"fs-idm99647056\">If GDP now falls back to 1,500 and the money supply falls to 350, what is velocity?<\/p>\n<\/div>\n<\/div>\n<\/section>\n<\/div>\n<\/section>\n<section id=\"fs-idm94381152\" class=\"references\">\n<h3>References<\/h3>\n<p id=\"fs-idm1837520\">Tobin, James. &#8220;The Concise Encyclopedia of Economics: Monetary Policy.&#8221; <em>Library of Economics and Liberty<\/em>. Accessed November 2013. http:\/\/www.econlib.org\/library\/Enc\/MonetaryPolicy.html.<\/p>\n<p id=\"fs-idm110654720\">Federal Reserve Bank of New York. &#8220;The Founding of the Fed.&#8221; Accessed November 2013. http:\/\/www.newyorkfed.org\/aboutthefed\/history_article.html.<\/p>\n<\/section>\n<div>\n<div class=\"textbox shaded\">\n<h3>Glossary<\/h3>\n<dl id=\"fs-idm169011568\">\n<dt>basic quantity equation of money<\/dt>\n<dd id=\"fs-idm129666416\">money supply \u00d7 velocity = nominal GDP<\/dd>\n<\/dl>\n<dl id=\"fs-idm36890848\">\n<dt>excess reserves<\/dt>\n<dd id=\"fs-idm110200448\">reserves banks hold that exceed the legally mandated limit<\/dd>\n<\/dl>\n<dl id=\"fs-idm163533680\">\n<dt>inflation targeting<\/dt>\n<dd id=\"fs-idm163189680\">a rule that the central bank is required to focus only on keeping inflation low<\/dd>\n<\/dl>\n<dl id=\"fs-idm41906160\">\n<dt>velocity<\/dt>\n<dd id=\"fs-idm70648288\">the speed with which money circulates through the economy; calculated as the nominal GDP divided by the money supply<span style=\"font-size: 1rem;text-align: initial\">\u00a0<\/span><\/dd>\n<\/dl>\n<\/div>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-475\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Principles of Macroeconomics 2e. <strong>Provided by<\/strong>: OpenStax. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"http:\/\/cnx.org\/contents\/27f59064-990e-48f1-b604-5188b9086c29@5.5\">http:\/\/cnx.org\/contents\/27f59064-990e-48f1-b604-5188b9086c29@5.5<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em>. <strong>License Terms<\/strong>: Download for free at http:\/\/cnx.org\/contents\/27f59064-990e-48f1-b604-5188b9086c29@5.5<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":2,"menu_order":6,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"Principles of Macroeconomics 2e\",\"author\":\"\",\"organization\":\"OpenStax\",\"url\":\"http:\/\/cnx.org\/contents\/27f59064-990e-48f1-b604-5188b9086c29@5.5\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"Download for free at http:\/\/cnx.org\/contents\/27f59064-990e-48f1-b604-5188b9086c29@5.5\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-475","chapter","type-chapter","status-publish","hentry"],"part":454,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-fmcc-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/475","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-fmcc-macroeconomics\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-fmcc-macroeconomics\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-fmcc-macroeconomics\/wp-json\/wp\/v2\/users\/2"}],"version-history":[{"count":5,"href":"https:\/\/courses.lumenlearning.com\/suny-fmcc-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/475\/revisions"}],"predecessor-version":[{"id":1078,"href":"https:\/\/courses.lumenlearning.com\/suny-fmcc-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/475\/revisions\/1078"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-fmcc-macroeconomics\/wp-json\/pressbooks\/v2\/parts\/454"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-fmcc-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/475\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-fmcc-macroeconomics\/wp-json\/wp\/v2\/media?parent=475"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-fmcc-macroeconomics\/wp-json\/pressbooks\/v2\/chapter-type?post=475"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-fmcc-macroeconomics\/wp-json\/wp\/v2\/contributor?post=475"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-fmcc-macroeconomics\/wp-json\/wp\/v2\/license?post=475"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}