Macroeconomic Policy with Two Objectives: Basic Arguments

Abstract

The principal problem for macroeconomic policy makers since the late 1960s has been to maintain or increase the level of real output or employment without increasing the upward pressure on prices (and, if possible, reducing it). In subsequent discussion this second objective will be termed ‘reducing inflation’. It is to be understood as meaning ‘reducing the increase in prices, as measured by the change in the consumer price index or the gross national product/gross domestic product (GNP/GDP) price index (or “GDP deflator”) over the period that is of interest to the policy maker’. The main obstacle to taking sufficiently expansionary action to reduce unemployment has been the fear that any form of macroeconomic stimulus would be bound to increase the upward pressure on prices, rather than a conviction that there are no more available resources with which to increase real output and employment.