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November 1967

Money, Interest Rates, Prices, and Output

The money supply and commercial bank credit have risen rapidly since January. In recent months interest rates have also risen markedly. These developments might appear to be a paradox, but a close examination of economic relationships indicates that they can be interpreted in a way which is entirely consistent with economic theory. The developments in financial markets in the past two years have given rise to considerable question concerning the underlying forces affecting interest rates. This note traces these events and relates them to one frequently cited theory. Before discussing interest rate movements during the past two years, the current economic situation is briefly presented.