Monetary Policy and Relative Prices in an Incomes Policy

The prospects for achieving price stability and full employment sooner with wage and price controls than with traditional monetary and fiscal actions alone depend on the ability of the wage and price controls to dampen expectations of inflation. Until expectations of inflation are substantially reduced, inflationary pressures \vill remain strong evcn though measured prices are constrained by government controls. The role of monetary policy is to keep the expansion of aggregate demand in line with the expansion in productive capacity.1 Given an excessive rate of monetary expansion, inflation will break into the open as soon as government controls are removed.