ABSTRACT
Introduction It is clear from the last chapter that in the general case there is no unique policy that will serve to stabilize the general price level. It would be convenient if the behaviour of the general price level could be attributed in some simple manner to changes in the supply of money, as in the case of the crude Quantity Theory. In a Quantity Theory world control of the price level would be simple in principle for the price level could be prevented from rising by appropriate regulation of the quantity of money without affecting the level of employment. As we shall see later in this chapter, there are technical problems involved in manipulating the money supply itself, but at least the issue would be clear. Similarly appropriate policies to control inflation would be more self-evident if a rising general price level originated solely from an imbalance between the level of aggregate demand and the productive capacity of the economy. The issue in principle is again clear, for if prices were rising this would imply that demand was outstripping the rate of increase of production and by use of the gamut of conventional monetary and fiscal controls should be reduced until balance between aggregate demand and aggregate supply was restored.
