Monetary Policy

In the preceding sections of part II we learned that macroeconomic shocks involve problems like underemployment or fatal crowding out. In the current section, the limelight will be directed at monetary policy, which offers a radical change of perspective. More accurately, as a response to a shock, the central bank continuously adjusts the quantity of money so as to maintain full employment at all times. Accordingly there is no reason why money wages should move. Can this strategy be sustained? By the way, we return to the standard assumption that public consumption and the tax rate are given exogenously, thereby abandoning continuous budget balance.