The impact of monetary shocks on the economy can be severe from "summary" of A Monetary History of the United States, 1867-1960 by Milton Friedman,Anna Jacobson Schwartz
Monetary shocks, when they occur, can have a profound and lasting effect on the economy. These shocks, often caused by sudden changes in monetary policy or unexpected events in the financial markets, can disrupt the normal functioning of the economy and lead to significant consequences for businesses and households. One of the key ways in which monetary shocks impact the economy is through their effect on interest rates. When there is a sudden change in monetary policy, such as an increase in the money supply or a change in the interest rate, interest rates in the economy can rise or fall sharply. This can have a direct impact on the cost of borrowing for businesses and consumers, leading to changes in investment and consumption decisions. Furthermore, monetary shocks can also affect the overall level of economic activity in the economy. For example, a sudden tightening of monetary policy can lead to a decrease in aggregate demand, as businesses and consumers cut back on spending in response to higher interest rates. This can, in turn, lead to a decrease in output and employment levels, as businesses reduce production and lay off workers in order to adjust to the lower demand. In addition to their impact on interest rates and economic activity, monetary shocks can also have long-lasting effects on the stability of the financial system. Sudden changes in monetary policy can lead to volatility in financial markets, as investors react to the new information and adjust their portfolios accordingly. This can lead to sharp fluctuations in asset prices, such as stocks and bonds, which can have knock-on effects for financial institutions and the broader economy.- The impact of monetary shocks on the economy can be severe and wide-ranging. From changes in interest rates and economic activity to disruptions in the financial system, these shocks can have lasting consequences for businesses, consumers, and policymakers alike. As such, understanding the causes and effects of monetary shocks is essential for ensuring the stability and prosperity of the economy.
