Paul Krugman: A Teachable Money Moment


April 2, 2012, 12:35 PM

A Teachable Money Moment

So maybe I’m not completely wasting my time after all; I think we have a teachable moment here.
Let me offer a stylized description of the role of the Fed. Think of it as choosing a point on a downward-sloping demand curve for monetary base, the sum of bank reserves and currency in circulation. And yes, that is what the Fed does; its power comes from the fact that the Fed, and only the Fed, can add to or subtract from that stock of monetary base. So the picture looks like this, with the downward-sloping line representing the demand for base, and A representing the point the Fed chooses: