ECN 506 Chapter 15: Chapter 15-Money and Banking
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4 Aug 2016
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Every economy goes through different phases of business cycles in which output and employment are above or below their long run levels. During an economic expansion phase of the business cycle, output and employment are above the long-term level. Output and employment reach a peak at the end of an economic expansion. During a recession, on the other hand, output and employment decline below the long term level. Output and employment reach a trough at the end of the recession (see figure 17. 1 in the textbook). Stabilizing the economy means smoothing out the peaks and troughs in output and employment around their long-run growth paths. It is a key short run objective for the central banks. Even though monetary policy can"t affect either output or employment in the long run, it can affect them in the short run. Monetary policy tools are used to affect output, employment, and the inflation rate over the business cycle.