John A. Tatom explains the links between the variability of money growth and the variability of interest rates and between the latter and economic performance. Tatom describes the theoretical channels through which an increase in risk affects the economy, including how it reduces both the demand for and the supply of current goods and services. He examines the effects of the variability of interest rates on GNP, the price level and real output using a small reduced-form model of the economy and finds that increased risk reduces spending and output and raises price levels. Moreover, the evidence indicates that changes in anticipated, rather than unanticipated risk, influence spending, output, and prices. Specifically, Tatom finds a substantial negative effect from increased risk on both GNP and output growth over the 1980-83 period. In addition, changes in risk in 1980-83 account, in part, for temporarily higher inflation in 1980-81 and temporarily lower observed inflation in late 1982 and 1983.