Answer to Question #285249 in Macroeconomics for Appu

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 differently affected by fiscal and monetary policies.” What are some of the subsidiary targets referred to in the quote ? How would they be affected by alternate policy combinations?

Answer 1

It is apposite to presume that a nation can work upon the GDP path it really wish to have with a tight fiscal policy and an easier monetary policy. A tight fiscal policy implies a fiscal contraction that leads to reduction in the GDP level and the level of prices, somehow increases the GDP through crowding in. An easier monetary policy will increase the GDP and will increase the price level by stimulating the aggregate demand. These are the end targets and in between them there are various variables like the rate of interest, rate of unemployment, rate of growth of money supply, which are equally important. These are subsidiary targets and more than often, they are used as instruments to reach the final goals. As mentioned, a fiscal policy tightness will reduce the rate of interest, crowding in private investment. Similarly a monetary expansion might choose a path of increasing the rate of growth of money supply periodically.

Subsidiary targets are more significant to look for, aimed at the ultimate goals of real GDP and inflation rate. Targeting the rate of interest will direct all measures towards restoring the rate of interest at its target level and so both policies will be adjusted accordingly. In this sense, subsidiary targets are influenced by the policy choices.