The article, Lessons from the Depression, explores Fed Chief Ben Bernanke’s background as a student of the era and how he aims to not repeat mistakes made in the past. Bernanke concluded that the actions taken by the Fed’s to increase interest rates during the depression actually lengthen it. So as a response to our current financial crisis, he has charted a course of lower interest rates despite concerns of inflation and the weakening dollar.
If the supply of money is held constant, a reduction in interest rates should increase the demand for money –causing a rightward shift of the demand curve. This shift in demand should drive prices higher, or in other words, should encourage inflation (all other factors held constant). Is this the price we have to pay to dampen the blow of an all out recession?