National Income and Flow-of-Funds Analysis

By John P. Powelson | Go to book overview

Chapter 16
INFLATION*

The gross national product of Nolandia was $1,000. The butcher said he would buy $500 of it, the baker wanted to consume $450, and the candlestick maker swore he could not live on less than $400. Whose demand was excessive?


POSSIBLE CONFLICTS BETWEEN STABILITY AND GROWTH

Do the objectives of stability and growth ever oppose each other? Obviously they do not during a depression, for growth in output and full- employment stability are sought in the same direction. But when the economy is already fully employed and prosperous, do the problems inherent in economic growth conflict with the requirements of economic stability?

Some maintain that growth and stability clash because, in society's quest for saving and investment, the possibility of cumulative downswing is ever-present. Not only is population increasing day by day, but we are forever learning how to produce more and more with less and less labor. The production frontier is always pushing outward; unless output grows at the rate of increase in the physical ability to produce, the goal of stability (at full employment) is sacrificed.

As a margin of insurance against a chute into equilibrium at less than full employment, members of this school propose policies for keeping aggregate demand (i.e., demand for investment and consumption goods together) just a little higher than can be satisfied on the current production frontier. They propose that the monetary authorities keep the interest rate low enough so that (if possible) it is always a little below the marginal efficiency of capital. This low rate will also discourage excessive saving (since some saving may be interest-induced), thus helping maintain consumption demand.

____________________
*
This chapter and the following one treat only inflation caused by a "demand pull," which is referred to as "demand inflation." More recent theories (e.g., "cost push") are reserved for Chapter 22.

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