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Money and Financial Markets

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Because price stability is a long-run goal of the Federal Reserve System, monetary policy’s effect on inflation is always a major concern. One way to gauge the effect is to return to the classic definition of inflation: too much money chasing too few goods. This notion is illustrated by a simple model that compares the amount of money in circulation with the usual amount demanded at current interest rates and output. While it generally predicts the direction of inflation throughout the mid- to late 1990s, it misses badly on the recent drop.

Suggested citation: "Money and Financial Markets," Federal Reserve Bank of Cleveland, Economic Trends, no. 02-05, pp. 05-07, 05.01.2002.

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