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Date:      Wed, 24 May 2000 18:20:37 -0700
From:      "David Schwartz" <davids@webmaster.com>
To:        "Terry Lambert" <tlambert@primenet.com>, "Doug Barton" <Doug@gorean.org>
Cc:        "Brett Glass" <brett@lariat.org>, <chat@FreeBSD.ORG>
Subject:   RE: The Ethics of Free Software
Message-ID:  <000001bfc5e7$6f024440$021d85d1@youwant.to>
In-Reply-To: <200005242353.QAA08949@usr05.primenet.com>

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Terry Lambert wrote:

> I have never really understood the idea of the chairman of the
> U.S Federal Reserve bank raising interest rates "because the
> economy is running too hot".  There may be good reasons for
> artificially braking the economy from where it would go in an
> otherwise unregulated system, but I haven't ever seen any math
> to tell me why where it would go in an otherwise unregulated
> system, at least for the interest rate constraint, would be an
> undesirable place.

	I must admit that this has never been satisfactorily explained to me
either. But the gist of it is supposedly:

	1) Prices are the result of supply and demand. Not just the supply and
demand of the good, but also the supply and demand of money. If the amount
of available money increases, then all prices can increase. This is
inflation.

	2) There are several ways the effective supply of money can go up. One way
is if money moves faster. That is, money you stuff in a mattress isn't
inflationary but money that you move around is.

	3) An increase in the interest rate decreases the rate at which money
moves. People are more likely to leave money where it is than move it
because: A) if it's in a bank, they're making more money leaving it there,
and B) people are less likely to borrow money because it costs them more to
do so.

	The term "running to hot" means that money is changing hands very rapidly.
The risk is allegedly that this will result in inflation. Raising the
interest rate slows this process.

	At least, that's how it's been explained to me.

	DS



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