1. The Challenges of Monetary Policy
CHAPTER 25
The Challenges of Monetary Policy

2. The Goals of Monetary Policy
Long Run
Sustainable Economic Growth determined by the growth and productivity of labor and capital
Short Run
Full Employment
Achieving these goals in the short run helps to achieve maximum sustainable economic growth in the long run
Stable Prices
Satisfactory External Balance compatible with full employment and stable prices

3. Steady Noninflationary Growth
Price Level
Real GDP (in Billions)
1.10
1.05
1.00
$4,000 $4,120 $4,244 C I D B A AD
AD'
A''
LRAS
LRAS'
LRAS''

4. An Unexpected Increase in Aggregate Demand with No Fed Response*
LRAS
Price Level
SRAS' C
SRAS
1.10
1.05
1.00 B A
AD' AD
$1,500 $1,700
Real GDP (in Billions)
*This exhibit is an abbreviated version of Exhibit 24-8.

5. Possible Policy Maker Response to an Unexpected Increase in Aggregate Demand
Price Level
LRAS
SRAS AD
AD' A B
Real GDP

6. Demand-Induced Recession
Price Level
LRAS
SRAS AD
AD' A
Real GDP (in Billions)
1.00
.95
.90
SRAS' B C

7. An Adverse Supply Shock as a Cause of Cost-Push Inflation
LRAS
Price Level
SRAS' C
SRAS B A
AD' AD
Real GDP