K-Percent Rule
What is the K-Percent Rule?
The K-percent rule is a monetary theory that states that the Federal Reserve should grow the money supply by a set amount per year ("K percent"). Economist Milton Friedman developed the theory.
How Does the K-Percent Rule Work?
Often, the K-percent rule mirrors GDP growth, meaning that K = growth in GDP. GDP growth is usually between 1% and 5%. If the Federal Reserve wants to stimulate a sluggish economy, it might make K > GDP growth, meaning that it grows the money supply at a rate higher than the rate of growth in the economy as a whole. If the Federal Reserve wants to slow down the economy, it might make K < GDP growth, meaning that it grows the money supply at a rate lower than the rate of growth in the economy as a whole.
Why Does the K-Percent Rule Matter?
One of the Federal Reserve's primary duties is to protect and stabilize the American economy. This means ensuring that the economy neither grows too slowly or too quickly. Quick growth, in particular, creates inflation. The K-percent rule regulates how much the money supply grows in the United States, thereby keeping inflation in check.
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