BEP342 CHAPTER 6 Critiques of Moneta

BEP342
CHAPTER 6
Critiques of Monetary Policy
From Money and Banking: An Intermediate Market-Based
Approach
By William D. Gerdes
(A Business Expert Press Book)
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CHAPTER 6
Fiat money is a relatively new phenomenon. It has been in use
slightly
more than three-quarters of one century. Tus, how historians
will even-
tually evaluate this experiment with fat money is yet to be
determined.
It is probably an understatement to suggest that the U.S.
experience with
this type of money, to this point, has not been an unmitigated
success.
Because fat monies are controlled by governments, what
historians must
eventually assess is how governments have performed.

Monetary policy is reasonably transparent and the performance
of
governments as custodians of fat money has not gone unnoticed.
Te
critiques discussed in the next sections are not concerned with
situations
where seigniorage is the principal motive of monetary
authorities. Rather,
the focus is on the practice of discretionary monetary policy in
countries
where macroeconomic management is the driving force behind
policy.
A common thread in critiques of monetary policy is the critical
role that
knowledge plays in the successful implementati on of
discretionary mon-
etary policy. Te critiques that follow demonstrate the multi -
dimensional
nature of the knowledge issue.
One very important kind of knowledge required of central
bankers
is knowledge about the performance of the economy, somethi ng
that is
necessary if monetary authorities are to know whether monetary
ease or
tighter money is the appropriate policy. When knowledge does
exist, it
is not always apparent that central bankers will be in a position
to utilize
that knowledge. Political considerations may interfere. Central
banks are
also expected to understand how the policy they enact is
transmitted to

the economy, and how those afected will respond to that policy.
Finally,
it is important for central banks to know what efect, if any, the
infusion
of new money has on relative prices and the allocation of
resources across
markets.
Universiti Utara Malaysia from
Apr 2021 to Oct 2021.
112 MONEY AND BANKING: AN INTERMEDIATE
MARKET-BASED APPROACH
Friedman: Rules vs. Discretion
Milton Friedman argued that the use of discretionary monetary
policy has
resulted in increased economic instability. Te problem is not
with the use
of fat money. Rather, it is with the procedures employed by
central banks
to implement monetary policy, specifcally the use of
discretionary policy.
Replacing that type of policy with a monetary rule would
greatly reduce
economic uncertainty, especially uncertainty about the future
course of
monetary policy. Tis would provide a much better climate for
produc-

tive activity and eliminate much of the economic instability
occasioned
by the use of fat money.
In fashioning this position, Friedman’s posture is diametrically
opposed to those who favor the use of discretionary policy.
Proponents of
discretionary policy maintain that its use can greatly improve
macroeco-
nomic performance. Appropriate application of policy
instruments will
both reduce short-run business cycle fuctuations and bring us
greater
long-run price stability. Monetary stimulation during a
recession, for
example, will shorten the recession. If too much infation is the
problem,
tighter monetary policy is in order.
Friedman’s case against discretionary policy is that those
implement-
ing such policies most often do the wrong thing. Two principal
reasons
for this are: 1) politics, and 2) ignorance. By doing the wrong
thing, those
implementing discretionary policies make economic conditions
worse
rather than better.
Politics
Economic analysis of monetary policy often proceeds as if this
policy were
conducted in a political vacuum. Tat decidedly is not the case.
Monetary
policy is carried out by government, and the political

consequences of
a policy action receive careful consideration. What is
considered ratio-
nal policy from a political perspective can difer signifcantly
from that
implied by economic theory. If political considerations
dominate, those
implementing discretionary policy may, with good reason,
deliberately
select the incorrect economic policy.
Political considerations can afect monetary policy even in
countries
(such as the United States) that have a fairly independent
central bank.
When, for example, is a good time for the central bank to
invoke a tighter
Apr 2021 to Oct 2021.
CRITIqUES OF MONETARY POLICY 113
monetary policy that results in higher nominal interest rates?
From a
political perspective, the likely answer is never. As a
consequence, central
bankers bold enough to undertake such policies can expect
politicians
to sharply criticize their actions. Tat may be enough for
policymakers
contemplating such action to reconsider.

Elections cycles also create problems for those implementing
discre-
tionary monetary policy. In the absence of political pressure,
introducing
a policy change too close to an election can be interpreted as
politically
motivated. For central bankers in democratic countries who are
sensitive
to such charges, this might inhibit the implementation of an
otherwise
appropriate change in monetary policy.
A second way that election cycles infuence monetary policy is
through
the actions of politicians concerned about an imminent election.
Tey
might exert pressure on central bankers to undertake policies
favorable to
their election (or reelection). Research suggests that, in the
United States,
this may be the rule rather than the exception. For the period
from 1951
to the end of the 1970s, Robert Weintraub found that changes in
Presi-
dential administrations generally resulted in changes in
monetary policy
in a direction consistent with the economic views of the
President.1 Given
that Ronald Regan ran on a platform of reducing infation, Paul
Volker’s
disinfationary policies in the 1980s are an indication that
Weintraub’s
results extend beyond his sample period.
A prototypical case study in central bank accommodation was

President Richard Nixon’s reelection campaign in 1972. Infation
was
increasing at the time, and economic theory implied a tighter
monetary
policy. Tighter money, however, was not the policy of choice
for President
Nixon. From his perspective, such policies had cost him the
Presiden-
tial election in 1960. He was not interested in a repeat of that
experi-
ence. Federal Reserve Chairman Arthur Burns accommodated
President
Nixon’s desire that monetary policy not be tightened. Nixon
won the
election, but at a considerable cost to the economy.
Ignorance
A second reason for the failure of discretionary policies is
ignorance. Te
existence of time lags presents a major problem for those
attempting to
implement discretionary policies. Tese lags imply that policy
carried out
Apr 2021 to Oct 2021.

today has its impact in the future. Selection of the appropriate
policy,
then, requires the ability to forecast accurately. Economists,
however, are
notoriously weak when it comes to forecasting future economic
activity.
Tis ignorance is especially pronounced for turning points in the
econ-
omy, where one would anticipate signifcant changes in
discretionary
policy.
Tree time lags encountered when implementing discretionary
policy
are the recognition lag, the execution lag, and the impact lag.
To illustrate
the difculties introduced by these time lags, refer to Figure 6.1.
Real
GDP (y) is plotted against time (t). Te business cycle peak
occurs at time
t1, with GDP equal to y1.
Te decline in economic activity commencing at time t1 is not
discov-
ered until time t2. One reason for this lag is that published
economic data
generally are a record of the past, and turning points in
economic activity
often are not discovered in these data until well after they
happen. For
this cycle, the time interval (t2 – t1) is the recognition lag. It is
the time
that elapses between when the economy changes, and when

policy makers
know about the change.
Te policy response is not instantaneous. In the case of monetary
pol-
icy, the central bank must both adopt a new policy and
implement that
policy. Tese events too, require time. Assume that the policy
response,
which is additional monetary stimulation, occurs at time t3. Te
time
interval (t3 – t2), then, is the execution lag. Tis is the amount
time that
elapses between recognition of the problem and when policy
makers
undertake appropriate policy action.
y
y1
y0
y2
y3
y4
t0 t1 t2 t3 t4 t
Figure 6.1 Discretionary policy with time lags
Apr 2021 to Oct 2021.

Te impact of this policy action, likewise, is not instantaneous.
Rather
than occurring at a point in time, it is distributed over a period
of time.
Te precise timing of the impact is unknown. Friedman’s
estimates for
the U.S. economy are that it will have little (or no) impact for
the frst
9–12 months, with the total impact occurring over a period of
years.
Simplifying, assume that the impact of monetary policy does
occur at
a single point in time (t4). By that time, the economy has
already entered
the expansionary phase of the business cycle. To moderate
business cycle
fuctuations, this phase of the cycle calls for monetary restraint.
Instead
of monetary restraint, however, the central bank is providing
monetary
stimulus. It has done the wrong thing. Monetary policy will
accentuate
the business cycle upswing and, in doing so, it increases the
amplitude of
the business cycle.
Given the existence of these time lags, appropriate discretionary
pol-
icy for this economic cycle requires that the central bank
undertake sim-
ulative policy before the business cycle downturn occurs, e.g.,

at time t0.
Te wisdom to do so, however, requires that (central bank)
economists
correctly forecast the impending peak at t1. Teir inability to
accurately
forecast turning points, or ignorance, generally precludes that.
Friedman’s x-Percent Money Growth Rule
Even though it is inadvertent, central bank implementation of
discre-
tionary monetary policy often makes things worse rather than
better. For
that reason, Friedman recommended scrapping discretionary
policy. In
its place, the central bank should follow a rule and increase the
money
supply at a constant rate. If, for example, a rate of 4% is
selected, the
central bank increases the money supply 4% each year. Tat is
Friedman’s
x-percent money growth rule.
Te particular growth rate that is selected is less important than
select-
ing one. A rate in the neighborhood of 4% may be desirable,
however,
because it approximates the secular growth rate for production.
Synchro-
nizing the growth of money and output would permit
(proximate) long-
run price stability.
Friedman maintains that the potential benefts of employing a
monetary growth rule are enormous. Te principal one is a more
stable

Apr 2021 to Oct 2021.
economy. A volatile monetary policy contributes to economic
instability,
thus increasing the amplitude of the business cycle. Use of a
monetary
rule efectively eliminates this source of cyclical instability.
A second beneft is increased long-run economic growth. As
mone-
tary policy becomes more predictable, the uncertainty faced by
those in
private business is greatly diminished. Tis lowers the risk
premium in
interest rates, and will increase the rate of capital formation in
the econ-
omy. More capital formation leads to increased worker
productivity and
higher living standards.
Finally, use of a monetary rule will eliminate of secular
infation. Had
the Federal Reserve employed such a rule in the past half-
century, the great

depreciation that occurred in the purchasing power of the U.S.
dollar would
have been avoided. Elimination of secular infation will enhance
the ser-
vices provided by money, especially those eroded by
unremitting infation.
Despite these potential benefts, Friedman is aware of the forces
militating against adoption of a monetary rule. A major force is
the spir-
itual legacy of the Enlightenment. Te great scientifc and
economic
achievements of the past several centuries have nurtured the
sense that
man has the ability to make things better through manipulation
and con-
trol. When placed in a monetary context, this perspective makes
it easier
for central bankers to inspire confdence in their ability to
successfully
manage monetary afairs.
Public confdence in central bank stewardship is reinforced by
central
bank resistance to a monetary rule. Given the complexities of a
modern
economy, central bankers are often given much greater credit
for their
ability to manipulate aggregate economic activity than is
warranted by
experience. Te general public often basks in the comfort of a
central
bank that is “in control.” As human beings, it is natural that
central bank-
ers fnd such deference to their skills and infuence quite
fattering. It is

contrary to human nature to expect them to embrace the
prospect of
replacing their reasoned judgments with a mechanical procedure
that
greatly diminishes their social signifcance.
The Road Not Taken: A Friedman Case Study
It is not possible to know what would have happened had the
Federal
Reserve followed Friedman’s x-percent money growth rule. Tat
is a road
Apr 2021 to Oct 2021.
Table 6.1 Dynamic Equation of Exchange for the U.S. Economy
(Average Annual Growth Rate: 1959–2015)
dM/M + dV/V = dP/P + dy/y
Actual U.S. data 6.9 -0.4 3.4 3.1
Data with x-percent money growth 4.0 -0.4 -0.5 4.1

Source: U.S. Department of Commerce, www.bea/gov (retrieved
10/24/2016), and U.S. Govern-
ment Printing Offce, Economic Report of the President (various
issues), www.presidency/ucsb/
edu/economic_reports (retrieved 10/24/2016).
not taken. It is possible, however, to simulate what Friedman
had in mind
through the prism of the dynamic version of the equation of
exchange.
In Table 6.1, that relationship is utilized to compare actual data
for the
56-year period from 1959–2015 with hypothesized data using
Friedman’s
x-percent growth rule.
From 1959–2015, annual U.S. money growth (dM2/M2)
averaged
6.9%. Long-run velocity was relatively stable, declining at an
average
annual rate of 0.4%. Real Gross Domestic Product growth
(dy/y) averaged
3.1%. With too much money chasing too few goods, the United
States
experienced an average secular infation rate (dP/P) of 3.4% per
year.
By comparison, assume the Federal Reserve implements
Friedman’s
x-percent growth rule by increasing the money supply by 4%
each year.
Te velocity of money is relatively stable with the assumed
annual growth
rate (dV/V) the same as the actual growth rate for 1959–2015: –
0.4%.
Friedman argued that such monetary stability would lead to

higher eco-
nomic growth. Accordingly, the average annual growth rate for
real GDP
is 4.1%. Tat was the actual rate of growth for the 1950s, the
decade
prior to the implementation of Keynesian economic policies
during the
J.F. Kennedy administration.
For the period under consideration, Friedman’s x-percent money
growth rule yielded long-run price stability. Prices, on average,
declined
0.5% per year. Such price stability is comparable to that
experienced by the
United States when the country was using fduciary money (prior
to 1933).
Had the United States actually experienced such price stability,
the
considerable erosion in the services provided by money would
probably
not have occurred. For example, with long-run price stability,
money
would have continued to serve as a viable store of value. In
addition,
Friedman would likely make the case that United States would
have
been spared the dislocations and economic hardships associated
with the
Apr 2021 to Oct 2021.
www.presidency/ucsb

www.bea/gov
Great Infation of the 1970s and the ensuing disinfation of the
1980s.
He also might argue that, with the x-percent money growth rule,
the
United States would not have sufered through the Great
Recession of
2008–2009. A policy of providing new money at a steady rate
(instead
of pushing short-term interest rates close to zero for an
extended period)
would reduce the likelihood of an asset bubble in housing that
was at the
epicenter of the Great Recession.
Interest Rate Targeting
Central banks in relatively advanced countries generally employ
inter-
est rate targeting to implement discretionary monetary policy.
Excluding
the four-year interlude from 1979–1983, the Federal Reserve
System in
the United States has targeted interest rates for several decades.
While the
analysis that follows applies to interest rate targeting more
generally, the
issue is framed within the context of U.S. monetary policy.
Federal Reserve interest rate targeting conforms to the
transmission

mechanism described as Model I in the previous chapter. Te
instrument
variable is open market operations (OMO). Te immediate target
is the
short-term interest rate (ist). Te rate selected for this purpose is
the fed-
eral funds rate, or the rate on immediately available funds.
While it is a
nominal interest rate, the intermediate target is the long-term
real interest
rate (rlt). Te ultimate policy objectives are the price level and
aggregate
spending.
Te Fed encounters two very difcult problems when attempting
to
implement policy through this transmission mechanism. First, it
is using
a nominal interest rate target in a world where rational
economic agents
think in real terms. Te interest rate of importance, then, is the
unobserv-
able real interest rate. Second, the transmission of monetary
policy occurs
across the term structure of interest rates. Te immediate target
is a short-
term interest rate, but the critical variable is the long-term rate
of interest.
The Nominal/Real Dichotomy
Te success of Federal Reserve monetary policy is contingent
upon con-
trol of the real interest rate. Rational economic agents on both
sides of the

Apr 2021 to Oct 2021.
credit market think in real terms and, if one is to change their
behavior
through policy, it is the real interest rate that counts. Unlike the
nominal
interest rate, however, the real interest rate is unobservable. Te
difculty
presented here is that one cannot readily control something that
does not
lend itself to measurement. Tat problem is compounded when
preci-
sion is required. Tat is generally the case, however, because
policymakers
employing nominal immediate targets most often change those
interest
rate targets in increments of one-quarter to one-half percent.
Control of the unobservable real rate of interest is hypothesized
to
occur via changes in the Federal Reserve’s nominal interest rate
target
(the federal funds rate). As noted in Chapter 3, however, the
nominal rate
of interest, too, is comprised of nonobservable components:
infation-

ary expectations; default, money, and income risk premiums;
and, time
preferences. Each of these components refects the subjective
valuations
of millions of market participants. Because subjective
valuations of indi-
vidual economic agents are prone to change, one must operate
on the
premise that they do. Tat is, infationary expectations, risk
premiums,
and time preferences are incessantly changing.
If these nonobservable components of the nominal rate of
interest
are unstable, when the Fed changes its nominal interest rate
target, it
cannot know whether the real interest rate is increasing, falling,
or staying
the same. If a policy-induced higher real interest rate indicates
a tighter
monetary policy, and a policy-induced lower real rate the
opposite, the
Federal Reserve does not know whether its monetary policy is
tighter,
easier, or neutral.
To illustrate, three diferent scenarios are presented in Table 6.2.
Tey are designated as Cases I, II, and III. Te frst scenario (Case
I) is
the initial condition. Te nominal interest rate is 5%, which is
also the
Fed’s targeted interest rate. With a 2% expected rate of infation,
the real
Table 6.2 The Nominal Interest Rate and Its Components

i r (dp/p)* Risk premium
Marginal rate of
time preference
Case I 5 3 2 ½ 2½
Case II 6 4 2 ½ 3½
Case III 4 2 2 ½ 1½
Apr 2021 to Oct 2021.
interest rate is 3%. Te latter is apportioned into a risk premium
and a
marginal rate of time preference.2
Assume, initially, that the Federal Reserve attempts to tighten
mon-
etary policy. In Case II, it raises its target for the nominal
interest rate
to 6%, and provides reserves less liberally to the banking
system. With
tighter credit conditions, the nominal rate increases to the
desired level.
Assuming no change in infationary expectations, the real rate
increases to

4%. Te higher real rate of interest leads to reduced capital
goods expen-
ditures, and a higher marginal rate of time preference. In this
scenario, the
Fed thinks that monetary policy is tighter and, indeed, it is. Tis
is how
monetary policy with interest rate targeting is supposed to
work.
With the subjective preferences of economic agents constantly
chang-
ing, however, the world is much more complex than this. For
example,
do these Case II numbers still constitute tighter monetary policy
if the
higher real interest rate would have occurred as a result of
market activity
alone? Commence again with Case I initial conditions, i.e., i =
5% and
r = 3%. Now, assume an increasingly robust economy with
businessmen
becoming more optimistic. Teir increased time preferences for
current
expenditures are expressed in the form of a greater demand for
capital
goods. Tighter credit conditions lead to a higher nominal rate
(6%) and a
higher real rate (4%). Case II numbers again prevail.
Superimpose upon these events an increase in the Federal
Reserve’s
target for the nominal interest rate—from 5% to 6%. Te Fed’s
objective
is to increase the real interest rate by 1% (from 3% to 4%). In
this case,
the Fed does not need to adjust how it is providing reserves to

the bank-
ing system. Te higher interest rates come about through market
activity
alone, and do not refect any change in Fed policy. When the
Federal
Reserve adjusts its interest-rate target upward, that target is
simply fol-
lowing the market rate.
Tis is a case where the Federal Reserve thinks monetary policy
is
tighter when, in fact, it is not. Errors of this kind are likely
when the
real interest rate follows a pro-cyclical pattern. If business
managers and
consumers become more optimistic during a business cycle
expansion,
their greater optimism is expressed in the form of an increase in
their time
preferences for current expenditures. Te real (and nominal)
interest rate
rises. If the Federal Reserve simultaneously becomes concerned
about the
Apr 2021 to Oct 2021.
exuberant economy, it will move to tighten monetary policy. As
in the
example above, however, it will erroneously interpret the

market-driven
rise in interest rates as policy-induced.
Te Federal Reserve is prone to making the opposite kind of
error
when the economy is contracting. Business managers and
consumers
become more pessimistic. Tey experience decreases in their
time pref-
erences for current expenditures, and the real (and nominal)
interest rate
falls. Te Fed, in an attempt to stimulate aggregate demand,
lowers its
interest rate target. With the nominal and real rate already
falling, the
Fed is unable to distinguish market-induced declines in rates
from those
occasioned by Fed policy.
Tis scenario is captured in Case III (Table 6.2). Commencing
with
the initial condition (Case I), declines in the real and nominal
rate occur
in response to reduced time preferences. Te nominal rate falls
from 5%
to 4%; the real rate, from 3% to 2%. Simultaneously, the
Federal Reserve
lowers its target for the nominal interest rate from 5% to 4%. Its
intent is
to lower the real rate by a similar amount (from 3% to 2%). Te
Federal
Reserve does not need to adjust its provision of reserves to the
banking
system, because both the nominal and real rates reach their
targeted levels
through market activity. Tis is a case where the Fed thinks that

monetary
policy is easier when, in fact, it is not.
Tus, there are serious reservations concerning the Federal
Reserve’s
ability to efectively control the real rate of interest. When the
Fed changes
its nominal interest rate target, it does not know with any
assurance either
the magnitude or direction of policy-induced changes in the real
rate of
interest.
The Term Structure Problem
A second problem the Federal Reserve confronts when targeting
interest
rates relates to the term structure of interest rates. Not only
does the
Fed not know whether adjustments in its immediate target result
in the
desired change in the real interest rate, but those policy changes
also must
be transmitted across the term structure of interest rates. Te
Federal
Reserve’s operating target is the short-term nominal rate, but its
interme-
diate target is the long-term real interest rate.3
Apr 2021 to Oct 2021.

Te rationale for this transmission mechanism (Model I) is
discussed
in Chapter 5. Outlays for durable goods, both business and
consumer,
are more easily deferred than are expenditures for nondurable
goods. As a
consequence, durable goods account for much of the volatility
in aggre-
gate spending. Attempts by policy makers to infuence aggregate
spending
(and the price level), then, are geared towards controlling
expenditures for
those types of goods. With durable goods purchases frequently
fnanced
through the issue of long-term bonds, those purchasing durable
goods are
sensitive to the long-term rate of interest. It follows that, when
the Fed
employs interest rate targeting, it must target the long-rate.
Precisely how the Federal Reserve successfully navigates the
term
structure and, simultaneously engineers changes in the real
interest rate,
is not clear. Moreover, various theories of the term structure
(discussed in
Chapter 3) do not provide much help. If anything, they cast
additional
aspersion upon the Fed’s ability to successfully implement
discretionary
policy through interest-rate targeting.
Explanations based on the segmented markets hypothesis, for

exam-
ple, are not encouraging. If market participants adhere strongly
to their
maturity preferences, there is little likelihood that policy-
induced changes
in the short-term interest rate target will be transmitted across
the term
structure to long-term rates of interest. Federal Reserve control,
in turn,
is marginalized.
On the other hand, information requirements implied under the
unbiased expectations and the liquidity preference theories
present an
even more serious obstacle for those conducting monetary
policy. First,
the Fed must have prior knowledge of the term structure of
infation pre-
miums and the term structure of risk premiums. Second, it must
know
how those term structures are changing independent of monetary
policy.
Finally, it must also know how a given change in its short-term
interest
rate target will afect both of those underlying term structures.
Com-
pounding the Fed’s information problem is the fact that both
infationary
expectations and risk premiums are imbedded in the term
structure of
interest rates, and not directly observable.
It is clear that the U.S. central bank faces serious information
prob-
lems when attempting to target long-term real interest rates
through use

of a short-term nominal operating target. If the Federal Reserve
acts as
Apr 2021 to Oct 2021.
if it can orchestrate desired changes in aggregate spending and
the price
level through this procedure, it is committing what Friedrich
von Hayek
called “the pretense of knowledge.”4 It is pretending to know
things that,
in fact, it does not.
A Twenty-First Century Case Study
Tis knowledge problem confronting the Federal Reserve is a
good illus-
tration of what happens when the criteria for selecting monetary
targets
(discussed in the previous chapter) are not satisfed. Because it
is not pos-
sible to accurately measure the long-term real interest rate, the
Federal
Reserve is employing a target it cannot control. Moreover, lack
of knowl-
edge of the long-term real rate also means the linkages in Model
I are not

predictable.
U.S. monetary policy from 2004–2006 exemplifes the difculties
encountered when these monetary target criteria are not met.
Starting in
June, 2004, the Federal Reserve increased its target for the
federal funds
rate ffteen consecutive times. As a consequence, the federal
funds rate
target in April, 2006 was 4.75% versus 1.00% in the frst half of
2004.
Tose changes are chronicled in Table 6.3.
Many observers routinely describe these upward adjustments in
the federal funds rate target as tighter monetary policy. Tere are
seri-
ous doubts, however, about such an interpretation. It is true that
other
short-term nominal rates increased along with the federal funds
rate. Te
three-month Treasury-bill rate, for example, rose from 1.17% to
4.60%
between June 1, 2004 and March 1, 2006.5
But, as previously noted, higher short-term nominal interest
rates do
not necessarily mean tighter monetary policy. Long-term
nominal interest
rates actually fell during the same 21-month period. Te rate for
20-year
U.S. Treasury securities declined from 5.45% to 4.74%. Tese
changes
in both long-term and short-term rates for U.S. Treasury
securities are
refected in Figure 6.2. It depicts the shapes of the term structure
of inter-

est rates for U.S. Treasury securities on both June 1, 2004 and
March 1,
2006. Te yield curve in 2006 became noticeably fatter.
Lower long-term nominal interest rates, however, are not the
issue. It
is long-term real interest rates, and not nominal rates, that are
critical for
Apr 2021 to Oct 2021.
Table 6.3 Federal Funds Rate Target
Date Level (percent)
2006
March 28 4.75
January 31 4.50
2005
December 13 4.25
November 01 4.00

September 20 3.75
August 09 3.50
June 30 3.25
May 03 3.00
March 22 2.75
February 02 2.50
2004
December 14 2.25
November 10 2.00
September 21 1.75
August 10 1.50
June 30 1.25
2003
June 25 1.00
Source: Board of Governors of the Federal Reserve System.
6
5
4
3

2
1
0
3 month 6 month 1 year 5 year 10 year 20 year
6/1/2004 3/1/2006
Figure 6.2 Term structure of interest rates U.S. treasury
securities:
Constant maturity
Source: Board of Governors of the Federal Reserve.
Apr 2021 to Oct 2021.
economic decision makers. If monetary policy was, indeed,
tighter during
this 21-month period, long-term real interest rates must have
increased
while nominal rates were falling. Moreover, the increase in real
rates must
have occurred as a result of monetary policy and not due to
other factors
such as an increase in default risk or changes in time

preferences for cur-
rent expenditure. While such a scenario appears doubtful, no
one knows
for certain. Hence, the appropriate answer to the question about
whether
monetary policy is tighter is: “I don’t know.”
Monetary Aggregates and Monetary Control
Recent Issues with Monetary Control
After facing difculties with interest-rate targeting during and
after the
Great Recession (2008–2009), the Federal Reserve embarked on
sev-
eral massive asset purchase programs described as quantitative
easing.
Tose carried out during the Great Recession are discussed in
Chapter 5
(pp. 108–109).
While the Fed’s asset purchase programs were not advanced
with the
stated intent of increasing monetary aggregates, they did. In
doing so,
these programs raised an additional issue relating to central
bank control
of the money supply. Tese issues are discussed in the context of
the gen-
eral money supply model in Chapter 4 (equation 4.2).
Te magnitude of the Federal Reserve’s asset purchases caused
the
monetary base in the United States to explode. Base money
increased
more than 360% from 2007 and 2014, and was largely in the

form
of increases in bank reserves. Under more normal
circumstances,
one would anticipate a massive increase in the money supply,
huge
increases in spending, and the potential for the largest infation
in U.S.
history.
To date, none of these things have happened. Te reason is that
banks
have not used this infusion of bank reserves to extend additional
bank
credit (and expand deposit money). Instead, those reserves were
almost
entirely held in the form of excess reserves.
In the money supply model, an increase in the aggregate bank
excess
reserve ratio causes the money multiplier to decrease. In this
case, because
the increase in bank excess reserves was so massive, the
multiplier collapsed.
Apr 2021 to Oct 2021.

As shown in equation (6.1), the large increase in the monetary
base
was virtually entirely ofset by a fall in the money multiplier. In
the con-
text of these changes the consequences for money (which did
rise) were
minimal.
M = B m. (6.1)
← ↑ ↓
Tis experience has important implications for monetary policy.
It
difers from the liquidity trap explanation advanced by early
Keynesians.
In that case, the central bank increases the money supply and it
has no
efect on spending. People hold rather than spend the additional
money,
and velocity falls. When this happens, monetary policy is
inefective.
In the present case, the efectiveness of monetary policy is
questioned
for a diferent reason. Unlike the previous case, the money
supply does
not increase, or it does so minimally. What distinguishes the
recent expe-
rience is collapse of the money multiplier as shown in (6.1).
Te precipitous fall in the multiplier represents a breakdown in a
transmission mechanism for monetary policy. In Chapter 5, the
trans-
mission mechanism employing monetary aggregates as targets

was Model
II. In that transmission mechanism, what links base money to
the money
supply is the base money multiplier. Te usefulness of that
transmission
mechanism is predicated upon a predictable relationship for
transforming
base money into money. It is that relationship that fell apart.
Tis experience raises serious questions concerning the ability of
the
Federal Reserve to control the money supply. When combined
with the
lackluster results from interest rate targeting, it appears that
both trans-
mission mechanisms I and II for implementing discretionary
monetary
policy did not perform as expected during and after the Great
Recession
(2008–2009).
Why the Federal Reserve Needs an Exit Strategy
Te massive infusion of bank reserves (and base money) into the
U.S.
fnancial system from 2008 to the present leaves the Federal
Reserve with
an important legacy issue. If the United States is to avoid
signifcant
Apr 2021 to Oct 2021.

future infation, the Fed must undertake future monetary policy
that
(largely) removes that base money from the system or,
alternatively, pro-
vides banks with an incentive to not activate the massive excess
reserves
they now hold. Te description of how the Federal Reserve plans
to do
this is known as the Fed’s exit strategy.
Te magnitude of the problem confronting the Federal Reserve is
apparent in Table 6.4. From 2007–2014, bank reserves and base
money
increased by 2,813% and 364%, respectively. Tese dramatic
increases
were not refected in the money supply (M2) which rose by only
56.4%.
Tis surprisingly modest number is the result of the collapse of
the base
money multiplier (m), which fell by 64.4%. Tese data comport
with the
directional changes in equation (6.1) above.
Te problem confronting the Federal Reserve is about what
happens
if banks activate available excess reserves. Since the most
recent business
cycle trough (June, 2009), businesses and households have
behaved very
cautiously. Credit demands by both sectors have been
restrained, and

economic growth has been tepid.
Table 6.4 Bank Reserves, Base Money, Money Supply,
and the Money Multiplier for the United States 2001–2014
Year Reserves Base money M2 m
2001 86.3 641.1 5181.7 8.08
2002 88.1 697.1 5565.8 7.98
2003 93.4 741.0 5953.5 8.03
2004 96.3 776.8 6235.5 8.03
2005 96.7 806.6 6501.8 8.06
2006 95.0 835.0 6842.9 8.20
2007 93.9 850.5 7263.1 8.54
2008 234.9 835 7757.5 7.67
2009 945.2 1796.8 8383.0 4.67
2010 1143.4 2031.7 8593.4 4.23
2011 1575.7 2539.1 9224.7 3.63
2012 1612.0 2662.2 10020.0 3.76
2013 2144.2 3271.8 10696.4 3.27
2014 2735.4 3947.0 11356.8 2.88
Source: St. Louis Federal Reserve Bank-FRED
(//fred.stlouisfed.org), October 31, 2016.

Apr 2021 to Oct 2021.
https://fred.stlouisfed.org
If, in the future, both businesses and households throw caution
to
the wind, and become very aggressive in their demands for
credit, banks
(which are awash in liquidity) are in a position to accommodate
them.
Moreover, banking competition makes them inclined to do so. If
an indi-
vidual bank refuses a customer’s demand for credit, that
customer is likely
to take his/her banking business to another bank.
Meeting these credit demands means an increase in money
growth,
which has the potential to accelerate sharply. Te acceleration in
money
growth, in this case, is occasioned by an increase in the base
money mul-
tiplier. As banks reduce their holdings of excess reserves, the
aggregate
excess-reserve ratio falls and the money multiplier rises.

Te potential impact on the money supply is captured by
assuming
that the multiplier returns to its prerecession level of 8.54
(2007). If that
adjustment had occurred in 2014, the impact on the money
supply for
that year is shown in (6.2).
M2 = $33,707.4 = B = $3,947.0 * 8.54 (6.2)2014 * m2007
With a multiplier of 8.54 in 2014 (and assuming the same 2014
level for base money), the money supply would have been
$33,707.4
billion for that year instead of the recorded level of $11,356.8
billion.
Tat represents a 196.8% increase in the money supply. In other
words,
the money supply has the potential to grow this much if the
multiplier
were to return to its prerecession level. If all of this money
growth were
to occur in a single year, the average price would increase by a
magnitude
of the same order, or 196.8%.6 Tus, the potential exists for the
highest
infation rates in U.S. history. Tat is why the Federal Reserve
needs an
exit strategy.
Rational Expectations
Economists know that a person’s expectations afect the
economic deci-
sions made by that individual. Rational expectations theory is
concerned
with how those expectations are formed and, also, how

economists model
those expectations. Much of this theory was developed in
response to the
Apr 2021 to Oct 2021.
use of large macroeconometric models (by business and
government). Sta-
tistical in form, these models were an adjunct to the Keynesian
revolution
in macroeconomic theory. Te models often contained several
hundred
equations, and were used for forecasting purposes. Keynesian
economists
used the models to advise governments about the consequences
of difer-
ent activist policies, while those in the private sector used them
as an aid
in business decision-making.
Many of the equations in macroeconometric models were
behavioral
in nature. Tat necessitated the modeling of expectations, even
though
those expectations were unobservable. Proxies for these
unknown expec-
tations were most often obtained by assuming that economic
agents have
adaptive expectations. With this approach, the expected value of

a vari-
able was estimated as a weighted sum of past values of that
same vari-
able. Historical time series data were employed for rendering
concrete
estimates.
Econometric models constructed using this methodology often
result
in large forecasting errors, and economists in the rational
expectations
tradition have a ready explanation for this. Reliance on adaptive
expec-
tations as a proxy for actual expectations is an inherent
weakness of the
models. For, modeling human behavior in this way is
tantamount to
assuming that economic agents are irrational. Te reason is that
economic
agents with adaptive expectations make systematic errors. Tat
is, they
repeatedly make the same mistakes.
An alternative to assuming that expectations are adaptive is to
assume
they are rational. Rational individuals are not restricted to using
past
information (such as past values of variables) when forming
their expec-
tations. Teir expectations are formed by taking into account all
informa-
tion that is worthwhile acquiring. Agents behaving in this
fashion are said
to have rational expectations. Once the models of economists
incorporate
rational expectations, economic agents are less prone to making

the same
mistakes repeatedly—systematic errors. Moreover, such rational
behavior
has implications for the efectiveness of economic policy.
If economic policy afects economic agents in a signifcant way,
then it
is rational for them to take the efects of that policy into
account. Further-
more, if those administering policy behave consistently,
economic agents
will learn how that policy is implemented under diferent
economic
Apr 2021 to Oct 2021.
Table 6.5 Policy Impotence Theorem
Period M V = P y
I → ↑ → ↑
II ↑ ↓ → →
circumstances. Once they do, individuals will adjust their
behavior to
the policy, and make necessary behavioral changes before any

change in
policy is undertaken. Because adjustment to the policy has
already taken
place, no behavioral response follows any predictable change in
economic
policy. In rational expectations theory, this result is known as
the Policy
Impotence Teorem.
When behavior is rational in this sense, discretionary policy
loses its
efectiveness. An example of such policy impotence in the
context of ratio-
nal economic behavior is chronicled in Table 6.5. In Period I,
individuals
anticipate monetary ease that will occur in Period II. Sensing
that they
will be able to fnance additional expenditures at a lower rate in
the near
future, they adjust their current expenditures upward. Producers
respond
by increasing production in Period I and, in the absence of a
change in
the money supply, the ofsetting entry in the equation of
exchange is an
increase in the velocity of circulation of money (V↑).
In period II, the central bank increases the money supply to
stimu-
late aggregate demand. However, there is no increase in
spending because
rational economic agents anticipated this monetary stimulation
and have
already adjusted their spending plans (in Period I). In Table 6.5,
the
money supply increases in Period II but GDP expenditures

remain the
same. Te ofsetting entry is a decline in velocity (V↓). Te
monetary
ease engineered by the central bank in Period II has no efect on
current
spending, i.e., it was impotent.
Te rational expectations argument against the use of
discretionary
policy does difer from that of Friedman (and the monetarists) in
one
important respect. In Friedman’s case, discretionary policy does
not work
because policymakers are either ignorant or subject to political
infuence.
For the rational expectations economists, discretionary policy
does not
work because those afected by the policy are the opposite of
ignorant.
Tey are too smart (or rational).
Apr 2021 to Oct 2021.
The Austrian Perspective on Monetary Policy

Economists in the Austrian tradition generally favor “hard
money.” Tey
fnd it vexing that a monetary economist such as Milton
Friedman favors
reliance upon markets everywhere except in his area of
expertise, the realm
of money. Te Austrian position is that money is too important to
be
left to government. Instead, money and all monetary relations
should be
determined through exchange activities in the marketplace.
Because fdu-
ciary money was a spontaneous market development, and fat
money was
not, Austrians generally favor reestablishing fduciary money by
returning
to the gold standard.
If the quantity of money and all monetary relations are
determined
by market participants, government has no monetary role. Tere
is no
monetary policy. For that reason, Austrians are against all
monetary pol-
icy as practiced under fat money regimes. Tat would include
Friedman’s
monetary growth rule as well as all variations of discretionary
policy.
At the center of the Austrian critique of monetary policy is the
con-
cept of the price level. Te importance attached to the idea of an
average
price dates back to the early 20th century, when Irving Fisher
argued that
the value of money should be standardized.7 By this, he meant

that the
objective of government monetary policy should be to stabilize
the average
price, or the price level. While Fisher was unsuccessful in his
crusade to
standardize money, the concept of the price level subsequently
assumed a
life of its own. After governments mandated the use of fat
money, the price
level became a variable subject to manipulation by monetary
authorities.
Despite the eforts by central banks to manage the price level,
Austrians give the concept little credence. For them, the price
level has no
signifcance independent of its component parts—the individual
prices.
To the extent that there is an average price, it is an aggregation
of these
individual prices. In a market setting, each individual price has
meaning,
or informational content. Each is an expression of the subjective
valua-
tion that individuals have placed on that object. Viewed
collectively, a set
of individual prices represents relative valuations.
With no rigid dichotomy separating microeconomics and macro-
economics, the signifcance Austrians attach to individual prices
is not
restricted to the realm of microeconomics. Tey are equally
important

Apr 2021 to Oct 2021.
in a macroeconomic setting. Hence, when central banks
manipulate the
price level, without regard to its constituent parts, they destroy
the infor-
mational content of individual prices. In doing so, they disrupt
the crit-
ical role that prices play in coordinating the diverse economic
activities
that collectively make up the aggregate economy.
Assume, for example, that a central bank employs monetary
policy to
stabilize the average price. Te problem here is that market
participants
may have preferences that are not consistent with an unchanged
exchange
value for money. In the absence of monetary policy, they may
have valued
money either more highly or less highly than before. If they
valued money
more highly, their preferences were consistent with defation
rather than
price stability. Alternativel y, placing a lower value on money
would result
in infation.
When money is a strictly a market phenomenon, infation,
defation,
and price stability are all possible outcomes. Moreover, there is

no analyt-
ical basis for favoring one of these outcomes over the others.
Tis view is
antithetical to conventional thinking, especially with regard to
defation.
Most contemporary policymakers, and many economists,
consider defa-
tion highly undesirable—something that must be avoided at all
costs.
Te source of this bias against defation is the Great Depression
expe-
rience, when defation was accompanied by an unprecedented
drop in
production. To generalize from this episode, however, is
ahistorical. Data
generally do not afrm such a linkage between defation and
economic
decline.8 Moreover, given our experiences with fat money, it
seems much
more likely that massive economic decline would be
accompanied by sig-
nifcant infation rather than defation.
In contrast to the conventional view, Austrians do not readi ly
dismiss
defation when it is the natural outcome of economic activity.
Defation
generally occurs when a country’s growth rate for production
exceeds the
growth rate of money. Money becomes more scarce in relation
to goods,
and that tends to occasion an increase money’s exchange value.
Tis hap-
pened in the United States during the last third of the 19th
century. Te

country was on the gold standard, and there were few new
discoveries of
gold to augment the world’s gold supply.
Data for this period, assembled by Christina D. Romer, appear
in Table 6.6. Defation averaged 1.36% per year from 1869 to
1899.
Apr 2021 to Oct 2021.
Table 6.6 Prices and Production in the United States: 1869–
1899
(percent change)
Year Real GNP
GNP-Implicit price
defator
1869–1879 5.38 -3.23
1879–1889 3.21 0.03
1889–1899 3.82 -0.85
1869–1899 4.13 -1.36
Source: Romer (1989), pp. 1–37.

In contrast to the conventional view of defation, this period of
falling
prices was not one of economic calamity, or even malaise.
Instead, it was
a period characterized by much innovation and very rapid
industrializa-
tion. Te average growth rate for production was considerably
higher
than average growth during the 20th century. Moreover,
production
growth was, by far, most rapid in the decade with the highest
rate of
defation (1869–1879).
Historical episodes like this suggest that changes in the general
price
level (such as infation or defation) generally do not cause
problems when
they are driven by market forces. A collateral issue, though, is
whether
problems arise when the source of the price-level change is
monetary
manipulation by the central bank, and not market adjustments
occurring
in response to changing market conditions.
Austrians answer this question in the afrmative. Consider,
initially,
what happens when changes in the quantity of money are a
derivative of
the market process. Allocation of additional resources to the
production
of new money, in this case, originates with decisions made by
individ-
ual market participants. As a response to market demand, the

additional
money was, in a sense, “ordered” by those market participants.
It refects
their preferences concerning the use of scarce resources. Any
change in
prices brought about by the new money is, likewise, a part of
the same
market process whereby individual plans and preferences are
rendered
consistent with one another.
Te situation is entirely diferent when the source of a change in
money is the central bank. In this case, the additional money is
not
ordered by market participants. As a consequence, it is not a
part of the
Apr 2021 to Oct 2021.
market adjustment process that renders individual plans
consistent with

one another. Instead, the new money is a disruptive force in
markets. By
changing relative prices, compared to what they otherwise
would have
been, it destroys the informational content of market prices.
Relative
prices no longer represent that delicate balance necessary to
coordinate
economic activity across markets.
A critical price often distorted by monetary policy is the real
interest
rate. Tis rate refects the time preferences of market participants.
A given
real rate specifes how much future consumption economic
agents are
willing to sacrifce in order to have more present consumption.
By afect-
ing how consumers distribute consumption across time, the real
interest
rate plays an essential role in the intertemporal allocation of
resources.
When monetary policy brings about a change in the real interest
rate, it
adversely afects the intertemporal allocation of resources. It
does so by dis-
torting the informational content present in a market-determined
real rate
of interest rate. Te new real interest rate occasioned by
monetary policy
emits the “wrong” signal to market participants, and the
economic coor-
dination brought about by market prices is disrupted. Production
plans of
frms are no longer consistent with the preferences of their

customers.
Te disruptive infuence of monetary policy is illustrated by
compar-
ing situations with and without monetary policy. Te market
under scru-
tiny is the loanable funds market. Prior to the introduction of
monetary
policy, the real interest rate plays its allocative role. In doing
so, it renders
the plans of all economic agents consistent with one another.
Tose plans
are refected in the demand and supply curves D and S in Figure
6.3.
Plan consistency occurs at the market clearing rate r0. Te
quantity of
loanable funds supplied, S0, shows abstinence from present
consumption
by economic agents. It is exactly equal to the quantity of
loanable funds
demanded, D0. Tis demand originates with consumers desirous
of con-
suming more than their incomes, and producers borrowing to
acquire
capital goods.
Intertemporal economic coordination occurs in this case because
the real interest rate is transmitting the correct information to
mar-
ket participants. Te amount of resources released from (net)
present
consumption is precisely absorbed by those borrowing to
purchase cap-
ital goods. Tose abstaining from present consumption are
choosing

Apr 2021 to Oct 2021.
r S
S˜
r0
r1
D
D0, S0 D1, S1 D, S
Figure 6.3 Market for loanable funds
an increased amount of future consumption. Tat demand for
future
consumer goods will be accommodated by a larger volume of
future
output made possible by current capital formation.
Such intertemporal coordination of economic activity no longer
pre-
vails once monetary policy is introduced. Te reason is that the

informa-
tion contained in the real interest rate is distorted by monetary
policy.
To show this, assume the central bank increases the money
supply. Te
supply curve for loanable funds shifts to the right (to S´). Tere
is now an
excess supply of loanable funds at r0, and the real interest rate
falls to r1.
While this lower real interest rate does clear the credit market,
the rate
did not fall due to any change in the plans of individual
economic agents.
It did not fall, for example, because consumers desire to defer
more con-
sumption to the future, or because producers choose to purchase
fewer
capital goods. A lower real interest in either of those
circumstances would
convey such a change in preferences to others in the market.
Instead, the source of the decline in the real interest rate is the
addi-
tional funds made available through monetary policy. By falling
without
any changes in the plans of economic agents, the informational
content of
the real interest rate is compromised. At r1, the real interest rate
is below
the level (r0) that renders the diverse plans of economic agents
consistent
with one another. Te new real interest rate is transmitting the
wrong
signals to market participants.

Producers are encouraged to purchase more capital goods, and
they
bid the necessary resources away from those producing
consumer goods.
Apr 2021 to Oct 2021.
Te problem is that this redirection of resources is not consistent
with
consumer preferences. Consumers have not chosen to tradeof
additional
present consumption for more future consumption. Tis
miscommuni-
cation brought about by monetary policy has important
macroeconomic
consequences. At some point, this misallocation of resources
will have
to be rectifed. Te endplay involves economic recession with all
of its
attributes—falling (and possibly negative) profts, idle capital
goods,
unemployment, and business bankruptcies.
From the Austrian perspective, then, all monetary policy is
disruptive

rather than benefcial. It destroys the informational content of
market
prices. Unfortunately, to undo the pernicious efects of such
policy is
not a costless proposition. Requisite adjustments in the
allocation of
resources are similar to those that are necessary at the end of a
pro-
tracted war. Large quantities of resources are misallocated in
the sense
that they are used to produce war materials that are no longer
useful.
Tese situations often lead to a period of falling output and
increased
unemployment.
Case Study: Federal Reserve Policy and Malinvestment
Austrian economists make the case that recent Federal Reserve
policy is
instructive for understanding the nature of boom/bust cycles.
First and
foremost, such cycles are generated by central banking policy.
In that
context, the Great Recession of 2008–2009 is viewed as a
prototypical
business depression emanating from prior interest rate policies
of a central
bank, in this case the Federal Reserve.
In the frst decade of this century, Federal Reserve policymakers
were
convinced that the U.S. economy was facing the specter of
defation. As
noted earlier, such a prospect is generally viewed by those
implementing

monetary policy as an anathema. Te Federal Reserve reacted
accordingly.
Te antidote for defation was an increase in aggregate spending.
From
the Federal Reserve’s perspective, lower interest rates were in
order. Tat
they engineered. Te target rate for the federal funds rate was
reduced
sharply, and eventually held at 2.0% or less for more than three
years—
from November, 2001 to December, 2004. Te intent was to
defuse
defationary forces by encouraging greater spending on durable
goods.
Apr 2021 to Oct 2021.
Te problem, from an Austrian perspective, is that interest rates
are
something more than prices subject to manipulation by the Fed.
Tey
are critical for the intertemporal coordination of economic
activity. By
manipulating interest rates, the Federal Reserve destroyed the
informa-

tional content of market prices and disrupted the allocation of
resources
across time.
Te policy-induced lower interest rates encouraged more
roundabout
productive activities, i.e., a greater production of durable
goods. Tat,
indeed, was the Fed’s intent. Te difculty is that consumers did
not,
through their market activity, initiate the order for these
additional capi-
tal goods. Tey came about because consumers were reacting to a
false set
of prices engineered by the central bank.
In this episode, a sizable portion of the addition to the country’s
cap-
ital stock was in the form of new housing. Te housing boom
contrib-
uted, temporarily, to a more robust level of economic activity.
Tat boost
in activity was not to be permanent. From the Austrian
perspective, the
bloated housing stock was a manifestation of a previous
misallocation of
resources—one induced by Federal Reserve policy. It is what
Austrians
refer to as malinvestment. Te market correction, or the bust,
played out
as the Great Recession of 2008–2009.
Postscript
Tese critiques provide insight into the kinds of problems
confronting

modern governments as they manage fat money systems.
Collectively,
they explain why those charged with that responsibility often
perform
poorly and sometimes fail. Teir task is a daunting one. As an
indication,
critics cite the following skills and/or conditions as those most
likely to
result in a favorable discretionary monetar y policy experience.
• Monetary policy is driven by economic considerations, and is
generally unafected by politics.
• While individuals in the private sector are unable to accu-
rately forecast the future (and especially business cycle turning
points), individuals employed by the central bank are able to
do so.
Apr 2021 to Oct 2021.
• Te unobservable long-term real interest rate is amenable to
control by the central bank.
• Te money supply is amenable to control by the central bank.

• Even though economic agents in the private sector are afected
in a dramatic way by monetary policy, they make no attempt
to anticipate and respond to future central banking policy.
• Te role that prices, and especially the interest rate, play
in the coordination of economic activity can be safely
disregarded by monetary authorities.
Apr 2021 to Oct 2021.
Money and Banking_Cover Sheet_Ch_6Money and Banking
Gerdes 120Money and Banking Gerdes 121Money and Banking
Gerdes 146Money and Banking Gerdes 147
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/HRV (Za stvaranje Adobe PDF dokumenata najpogodnijih za
visokokvalitetni ispis prije tiskanja koristite ove postavke.
Stvoreni PDF dokumenti mogu se otvoriti Acrobat i Adobe
Reader 5.0 i kasnijim verzijama.)
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/NLD (Gebruik deze instellingen om Adobe PDF-documenten
te maken die zijn geoptimaliseerd voor prepress-afdrukken van
hoge kwaliteit. De gemaakte PDF-documenten kunnen worden
geopend met Acrobat en Adobe Reader 5.0 en hoger.)
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