(a) How does nominal GDP targeting differ from real GDP targeting? Why is real GDP targeting the...

Question:

(a) How does nominal GDP targeting differ from real GDP targeting? Why is real GDP targeting the riskier of the two strategies?

(b) Currently, no major central bank closely targets the money supply. Why do you think this is the case? Still, no major central bank completely ignores money growth? Why?

Gross Domestic Product

Gross Domestic Product offers the computational monetary worth of goods and services which is measured at the market price and they are produced within the country. It has two types that are nominal GDP and real GDP.

Answer and Explanation:

(a)As there are two types of GDP, that is nominal GDP and real GDP which are required to be in a stable position. Forecasting of these is too important for policymakers to make decisions about their current policies.

Monetary Policy serves a tool, that is, Nominal GDP Targeting which strives the central bank to manage the economic activities in which it doesn?t require the overall knowledge of aggregate output, employment or so on. It needs knowledge for the aggregate spending for targeting the Nominal GDP. It targets the level of nominal spending in the economy. For doing this, it doesn?t touch the inflation rates instead it uses many tools such as interest rate targeting or so on.

While real GDP targeting the level of real spending in the economy which is done by the consideration of many aggregate variables which is itself serves as a risky state; whereas, nominal GDP targeting has an ability to make a rectification of itself.

(b)Since central bank cannot ignore the growth of money because it?s the responsibility of the central bank for regulating the monetary policies. But it cannot closely target its supply directly. It is because it directly can?t influence the volume of money as it can only affect the extent of interest rates using its instruments through which money supply is influenced.


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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
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