about 1 percentage point to the growth rate of real gdp. of late, equity markets have given up some of their gains. however, economists who have studied the topic generally think that the consumption effect of a change in wealth generated by the stock market begins to build in the first year and may take two to three years to be fully felt. additionally, equity markets are a source of investment capital, and valuations in the stock market are one determinant of the cost of capital for businesses. external financing conditions, including equity valuations, are important because recent investments have increasingly been financed from external sources. external funds raised now account for about 20 percent of nominal capital expenditures - close to the highs of the past two decades. the year 2000 : a period of transition productivity - led growth continued through the first half of 2000, with real gdp racing ahead at a breakneck 5 - 1 / 4 percent annual rate. the growth of aggregate demand was clearly outpacing even the most optimistic projections for the growth of potential supply, and the dangers of an increase in inflation pressures were higher. in order to promote better balance between aggregate demand and potential supply and to contain inflationary pressures, the federal open market committee took additional firming actions, raising the benchmark federal funds rate 1 percentage point between february and may. even with these increases, the committee felt that the balance of risks to the economic outlook still was tipped toward greater inflation. signs of adjustment to a more sustainable level of growth of aggregate demand began to emerge over the course of the summer. but with no evidence either of a significant deterioration in price trends or a serious softening in economic activity, the fomc entered a period of watchful waiting. as you know, monetary policy works with long and variable lags, and the committee believed it appropriate to monitor how its earlier actions were affecting the economy before taking additional steps. as the second half of the year wore on, the data confirmed that a slowdown was under way. but for a while its extent and likely duration were still open questions. by the time of the november meeting of the fomc, the statistical evidence and developments in financial markets suggested that the growth of aggregate demand had slowed to a more sustainable pace that might even be a bit below the growth rate of the economy ’ s potential to produce. but with the labor markets quite tight and energy prices rising, the committee still saw a continuing risk of heightened inflation. economic conditions changed dramatically late in the year, though.

life for other equipment is about seven years. firms must invest in computers at a faster rate than that for other forms of capital just to maintain a given level of the capital stock. the rapid replacement of high - tech capital means that technological progress becomes “ embodied ” in the capital stock at a faster rate than is the case for longer - lived assets. the second feature of high - tech equipment that sets it apart from other classes of capital is the sensitivity of its demand to fluctuations in the cost of capital. economists have debated for decades about the magnitude of cost - of - capital effects on traditional capital goods. a past consensus was that the cost - of - capital effect was small and very difficult to identify empirically. a somewhat different conclusion has arisen lately when the same basic models of investment are applied to spending on computers alone. the latest research suggests that computers are quite sensitive to movements in the cost of capital. the combination of an apparently high price elasticity and a rapid decline in relative computer prices - - 20 percent per year over the past decade - - likely led to the boom in high - tech investment. a third characteristic of high - tech investment is the magnitude of “ external ” or “ spillover ” effects that it generates. high - tech equipment generates benefits not only to the owner of the machine but to other agents in the economy as well. i am thinking in particular about so - called network effects - - that is, linking computers together makes possible larger productivity gains than do computers operated as stand - alone units. although difficult to measure, such network effects certainly have stimulated the demand for high - tech equipment and have helped to speed up the dispersion of new technologies. supporting structural changes the technological changes inspired by investments in computers have enhanced the ability of businesses to reduce their operating expenses. in many industries, investments in information technologies have helped firms to cut back on the volume of inventories that they hold as a precaution against glitches in their supply chain or as a hedge against unexpected increases in aggregate demand. product development costs have probably also been reduced through the use of better computer hardware and software, and new communications technologies have increased the speed with which firms can share information - - both internally and with their customers and suppliers. this is the intersection of macroeconomics and management. many business observers now believe that these newer technologies are not only reducing the cost of transforming inputs into outputs but also decreasing “ interaction costs, ” the costs incurred in getting different people and companies to