Essay
The job would not appear to be that complicated. If the Fed can
make the economy grow faster by lowering interest rates, then presumably lower interest rates are always better. Indeed, why should
there be any limit to the rate at which the economy can grow? If we
begin to spend more freely when rates are cut from 7 percent to 5
percent, why stop there? If there are still people without jobs and
others without new cars, then let’s press on to 3 percent, or even
1 percent. New money for everyone! Sadly, there are limits to how
fast any economy can grow. If low interest rates, or “easy money,”
causes consumers to demand 5 percent more new PT Cruisers than
they purchased last year, then Chrysler must expand production by
5 percent. That means hiring more workers and buying more steel,
glass, electrical components, etc. At some point, it becomes difficult or
impossible for Chrysler to find these new inputs, particularly qualified
workers. At that point, the company simply cannot make enough PT
Cruisers to satisfy consumer demand; instead, the company begins
to raise prices. Meanwhile, autoworkers recognize that Chrysler is
desperate for labor, and the union demands higher wages.
The story does not stop there. The same thing would be happening throughout the economy, not just at Chrysler. If interest rates are
exceptionally low, firms will borrow to invest in new computer systems
