ABSTRACT
This chapter takes the cyclical mechanisms of the previous chapter and fleshes out the details of how they apply to a monetary economy and monetary policy. The real analysis of Chapter 2 can be translated directly into two basic monetary scenarios for business cycles. In the first scenario, increases in the rate of base money growth lower real interest rates, setting off a boom and a subsequent increase in economic cyclically. In the second scenario, an increase in monetary uncertainty or volatility induces an economic contraction without any prior boom. The courses of these scenarios already have been presented; this chapter expands upon these scenarios and relates them to the relevant issues in monetary theory and policy.
