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CHAPTER The Challenges of Monetary Policy Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. 25 The Goals of Monetary Policy Long Run Sustainable Economic Growth determined by the growth and productivity of labor and capital Short Run Full Employment Stable Prices Satisfactory External Balance compatible with full employment and stable prices Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Achieving these goals in the short run helps to achieve maximum sustainable economic growth in the long run Steady Noninflationary Growth Price Level LRAS LRAS' LRAS'' I 1.10 D 1.05 1.00 B A AD' AD $4,000 C $4,120 Real GDP (in Billions) Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. A'' $4,244 An Unexpected Increase in Aggregate Demand with No Fed Response* Price Level LRAS SRAS' C SRAS 1.10 B 1.05 1.00 A AD' AD $1,500 *This exhibit is an abbreviated version of Exhibit 24-8. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. $1,700 Real GDP (in Billions) Possible Policy Maker Response to an Unexpected Increase in Aggregate Demand LRAS Price Level SRAS B A AD' AD Real GDP Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Demand-Induced Recession LRAS Price Level SRAS .95 SRAS' A 1.00 B C .90 AD' Real GDP (in Billions) Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. AD An Adverse Supply Shock as a Cause of Cost-Push Inflation LRAS Price Level SRAS' C SRAS B A AD' AD Real GDP Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.