ABSTRACT
Interest rates, output and prices Changes in monetary conditions will lead to a change in nominal aggregate demand— the total demand for goods at a given level of prices. The ratio of wages to other costs in the economy as a whole will equal the ratio of labour's share in income to one minus that share. Employee compensation amounts to about two-thirds of national income in most advanced economies, and a little less in most developing countries, so the wages/other costs ratio are approximately 2. In some economies, money wage rates are indexed to prices. This is particularly evident in countries with a record of rapid and/or unpredictable inflation. The greater the rate of inflation, the more quickly firms reprice in reaction to it, and the smaller the transitory gain to output and employment following a monetary policy relaxation. A credible counter-inflation strategy is the key to reduce inflation. When this is in place, disinflation can be very rapid.
