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April 12, 197S

Mr. Allan Kieltxej^^
Department of Economies
302 JK'B
Brigham Young University
Provo, Utah 34602
Dear Allan;
1 appreciate your taking the time to send me the result*
of your simulations using the DRI model.
I must confess to some bewilderment as regards your
interpretation of the results. The simulation of a one-time increase
in M}, you say, " . . . shows lower inflation and higher real growth.
In the final quarter of the projection period, however, your figures
on the rate of inflation for the two simulations are almost Identical
-- that is, 4 to 4-1/4 per cent. The level of real GNP in that quarter,
moreover, is 2-1/2 per cent higher in the control simulation than
in the simulation with a Urge one-shot increase in M^.
My own view, however, is that either coarse of monetary
action would be unwise. Z do not believe we could add $8-1/2
billion to the stock of money overnight and then return immediately
to a 5-1/2 per cent growth of
without creating havoc in financial
m arkets. And a course of action that permitted growth in M} at an
average rate of around 9 per cent over the next 5 quarters would
endanger our future.




Sincerely yours.

A rth u r F . B u rn s
L E G: A F B ; j r g ; gm m

April 2, 1975

Dr. Arthur Burns, Chairman
Board of Governors
Federal Reserve System
Washington, DC 20013
Dear Arthur:
When we met at the White House about two weeks ago, you expressed interest
in the effects of my proposal to increase M, by $8.5 billion. I have used
the new DRI model to simulate the policy of increasing M, by $8.5 billion
at the end of the first quarter and maintaining an approximately 5 1/2 per­
cent annual rate of increase in M, this year. The simulation has slightly
more variable monetary growth than I would choose.
The results can be compared to the control simulation of DRI. Both have
a program of fiscal expansion slightly larger than the recently signed into
law. There are also some assumptions about energy prices, including
gradual deregulation and some small tax increase.
The control simulation produces the same money stock in the fourth quarter
of 1975 by having lower growth of money now and more later.
I do not wish to overrate the accuracy of the assumptions or of the
simulation. The comparison is of interest since it shows lower inflation
and higher real growth may result from the proposed one-time increase.
The simulation shows slightly higher real growth this year and no higher
inflation. The GNP deflator rises less, and the CPI rises very little
more. The control produces more real growth in 1976.
The outlook for future inflation, and the problem of getting back to
stability are the principal benefits of the one-time large increase. The
control simulation requires much higher growth of money in late 1975 and
early 1976. The effect on future inflation does not require elaboration.
I will be at this address for the next two weeks, if you wish to reply.
Sincerely,

Is 3/13
cc:

William Seidman
Alan Greenspan

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Young Trnive"itv- p™ ™ TTtah S fi09- ffinn
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Assuming $8.5 Billion Increase in
Followed by 5.5% Annual Increase in
Year and Quarter

1975 - 2

1975-3

1975 - 4

1976 - 1

1976 - i

Money Growth %
GNP (Billions)
GNP 1958 $
Real GNP % Change
Deflator %
CPI %

5.7
1449.3
782.6
3.9
6.0
7.6

4.6
1503.8
797.2
7.7
7.4
7.0

6.1
1542.2
806.0
4.5
5.5
4.9

5.7
1561.8
807.1
0.6
4.5
4.4

5.4
1591.0
813.7
3.3
4.1
4.4

7.5
1538.1
815.1
4.9
4.8
4.3

10.1
1575.1
833.3
9.2
4.3
4.3

Control Simulation
Money Growth
GNP (Billions)
GNP 1958 $
Real GNP % Change
Deflator %
CPI %




7.6
1421.5
780.2
-0.4
7.4
7.7

9.4
1445.6
789.5
4.9
6.7
6.6

10.3
1486.7
805.3
8.3
5.8
4.7


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102