In the foregoing chapters, we saw that in the classical case of freely adjusting wage rates and prices, a full-employment equilibrium would emerge under which aggregate supply equaled aggregate demand and under which changes in aggregate demand would affect only prices and wages. Increases in aggregate demand would bring about proportionate increases in prices and wages and decreases in aggregate demand would bring about proportionate decreases in prices and wages, but output would not change.
In this chapter, we review the problem faced by the government in adjusting the rate of growth of the money supply to the underlying conditions relating to the labor market and to the growth of real GDP. There are, ...
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