Transcript The Goals of Monetary Policy

CHAPTER
The Challenges of Monetary Policy
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
25
The Goals of Monetary Policy
Long Run
Sustainable Economic Growth
determined by the growth and
productivity of labor and capital
Short Run
Full
Employment
Stable Prices
Satisfactory External Balance
compatible with full employment
and stable prices
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
Achieving these goals in the short
run helps to achieve maximum
sustainable economic growth in
the long run
Steady Noninflationary Growth
Price
Level
LRAS
LRAS'
LRAS''
I
1.10
D
1.05
1.00
B
A
AD'
AD
$4,000
C
$4,120
Real GDP (in Billions)
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
A''
$4,244
An Unexpected Increase in Aggregate
Demand with No Fed Response*
Price
Level
LRAS
SRAS'
C
SRAS
1.10
B
1.05
1.00
A
AD'
AD
$1,500
*This exhibit is an abbreviated version of Exhibit 24-8.
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
$1,700
Real GDP (in Billions)
Possible Policy Maker Response to an
Unexpected Increase in Aggregate Demand
LRAS
Price
Level
SRAS
B
A
AD'
AD
Real GDP
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Demand-Induced Recession
LRAS
Price
Level
SRAS
.95
SRAS'
A
1.00
B
C
.90
AD'
Real GDP (in Billions)
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AD
An Adverse Supply Shock as a
Cause of Cost-Push Inflation
LRAS
Price
Level
SRAS'
C
SRAS
B
A
AD'
AD
Real GDP
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.