The objective of monetary policy, laid out in the Federal Reserve Act, is to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” The conventional wisdom asserts that the price level is determined by the quantity of money supplied relative to the quantity of money demanded. The key observation of the conventional wisdom is that the fiscal authority controls one source of surplus, while the monetary authority controls the other. The key point is that the price of the stock responds so that it always equals the expected present value of future profits per share of outstanding stock. The key policy assumption of the fiscal theory is that it allows for fiscal policies such that if the real value of the government debt were to grow explosively, policy adjustments would be made to keep it in line.
ASJC Scopus subject areas
- Social Sciences(all)