September 01, 2015

Combining the two types of shocks, the real GDP growth rate (i.e. demand shocks) and the growth in the quantity of credit (i.e. supply shocks), allows us to model, understand, and hopefully anticipate the changes in the credit market equilibrium conditions. Within this context, we can then anticipate that a Fed tightening would result in a contraction of the credit relative to GDP, and that will result in higher interest rates, a lower inflation rate, and quite possibly an economic slowdown.

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