Answer to Question #225091 in Macroeconomics for Deema

Question

7. “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 include rate of interest, rate of unemployment, and rate of growth of money supply. These targets are used as instruments to reach the final goal. They are aimed at real GDP and inflation rat goals.

Policy decisions influence subsidiary targets. The fiscal policy reduces the interest rate while monetary expansion rises the interest rate. In conclusion, the rate of interest adjusts both policies.