indicator of the long-term inflation rate in the economy. The P* (pronounced P star) number tracks the growth of M2, a money supply measure, as modified by the velocity of money. If P* exceeds P (expected future prices), the Federal Reserve can be expected to tighten bank credit and interest rates, causing the economy to grow at a slower rate. When P* is less than P, the Federal Reserve can ease its credit policies, allowing bank credit and the money supply to grow at a faster rate.
where M2 is an official measure of the money supply (checks plus checkable deposits, savings, and time deposit accounts), V* is the velocity of M2, or the number of times that money turns over, and Q* is the estimated value of Gross National Product in the future, assuming the economy grows at 2.5% a year.
