Tuesday, November 11, 2008

Monetary Injection

Thanks to the rodrigo for his view of another monetary injection. If a stimulus is injected by increasing the money supply, interest rates will reach zero. The real pain will be inflation in four years when the temporary effects of government spending will wear off. Then, you will find much higher interest rates using the Fischer equation of Real Interest Rate plus Expected Inflation equals Nominal. I at least expect to see some employment generated from the stimulus. For you macro lovers, an injection finds equilibrium by adding "injections" of Government, Investment, and Exports. More of Rodrigo's cartoon can be found here.

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