Answer to Question #224889 in Macroeconomics for Anum naz

Question

“We can have the GDP path we want equally well with a tight fiscal policy and an easier
monetary policy, or the reverse, within fairly broad limits. The real basis for choice lies in
many subsidiary targets, besides real GDP and inflation, that are differentially affected by
fiscal and monetary policies.” What are some of the subsidiary targets referred to in the
quote? How would they be affected by alternative policy combinations?

Answer 1

Subsidiary targets being referred to include:

• Rate of money supply growth
• Rate of interest
• Rate of employment

Subsidiary targets are meant for setting the pace in the achievement of real GDP and to maximumly control the rate of inflation. A stabilized real GDP level and controlled rate of inflation are based on the subsidiary targets.

For instance, interest rates will be increased under monetary policy whereas under fiscal policy, they will be cut down. This shows the impact of these policies on subsidiary targets, in this case the adjustments that are encountered in the employment of the policies independently.