PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western. All rights reserved.

Chapter 14Objectives and

Targets of Macroeconomic

Policy

Copyright © 2004 South-Western. All rights reserved. 14–2

Fundamental Issues

1. What are the ultimate goals of macroeconomic policy?

2. Why might a central bank use an intermediate monetary policy target?

3. What are the pros and cons of alternative intermediate monetary policy targets?

4. What are the key propositions and fiscal policy prescriptions of supply-side economics?

Copyright © 2004 South-Western. All rights reserved. 14–3

Fundamental Issues (cont’d)

5. What is the assignment problem faced by monetary and fiscal policymakers of a nation that seeks to attain both domestic and international policy goals?

Copyright © 2004 South-Western. All rights reserved. 14–4 Figure 14–1

The Intermediate Targeting Strategy for Monetary Policy

Copyright © 2004 South-Western. All rights reserved. 14–5 Figure 14–2

Targeting the Nominal Interest Rate in the Face of Money Demand Variations

Copyright © 2004 South-Western. All rights reserved. 14–6 Figure 14–3

Targeting the Nominal Interest Rate in the Face of Variations in Autonomous Expenditures

Copyright © 2004 South-Western. All rights reserved. 14–7 Figure 14–4

Targeting the Money Stock in the Face of Variations in Autonomous Expenditures

Copyright © 2004 South-Western. All rights reserved. 14–8 Figure 14–5

Targeting the Money Stock in the Face of Money Demand Variations

Copyright © 2004 South-Western. All rights reserved. 14–9 Figure 14–6

The Problem of Aggregate

Supply Variability

Copyright © 2004 South-Western. All rights reserved. 14–10 Figure 14–7

Targeting Nominal GDP in the Face

of a Decline in Aggregate

Demand

Copyright © 2004 South-Western. All rights reserved. 14–11 Figure 14–8

Targeting Nominal GDPin the Face of a Decline

in Aggregate Supply

Copyright © 2004 South-Western. All rights reserved. 14–12Source: Economic Report of the President, 2002; Economic Indicators. Figure 14–9

The U.S. Net National Debt as a Percentage of Gross

Domestic Product

Copyright © 2004 South-Western. All rights reserved. 14–13Source: Economic Report of the President, 2002; Economic Indicators. Figure 14–10

The Share of the U.S. Net National Debt Held by Citizens of Other Nations

Copyright © 2004 South-Western. All rights reserved. 14–14Source: Economic Report of the President, 2002; Economic Indicators. Figure 14–11

Taxes on Saving and Investment andthe Growth of Output

Copyright © 2004 South-Western. All rights reserved. 14–15 Figure 14–12

Taxes on Wage Income and Employment and Output Growth

Copyright © 2004 South-Western. All rights reserved. 14–16Source: National Bureau of Economic Research. Figure 14–13

Estimates of U.S. Marginal Tax Rates on Dividends, Interest, Wages, and Capital Gains

Copyright © 2004 South-Western. All rights reserved. 14–17 Figure 14–14

Achieving Internal and External Balance with Low Capital Mobility

Copyright © 2004 South-Western. All rights reserved. 14–18 Figure 14–15

Achieving Internal and External Balance with High Capital Mobility

Copyright © 2004 South-Western. All rights reserved. 14–19Sources: Bank of New Zealand and Bank of Canada. Figure 14–16

Inflation Targeting in New Zealand and Canada