An article in the Economist discussing the advantages to a central bank of targeting nominal GDP rather than targeting inflation stated, “During the Great Recession, [nominal GDP] fell faster and more sharply than inflation. Though prices were relatively stable, households found themselves forced to pay bills with incomes much smaller than they had anticipated.” The article also remarked, “While the Fed could argue that such a [nominal GDP] target fits within its dual mandate to promote both price stability and maximum employment, the [European Central Bank,] charged with keeping prices stable above all else, has less freedom.”

a. What is nominal GDP targeting? 

b. Assuming that the article is correct that nominal GDP declined more than the inflation rate during the 2007– 2009 recession, would the Fed’s monetary policy during the period have been more expansionary or more contractionary if the Fed had been using a nominal GDP target? Briefly explain. 

c. Why would it be easier for a central bank to follow a nominal GDP target if it is concerned with both unemployment and inflation, as the Fed is, than if a central bank is concerned only with inflation, as the article states the European Central Bank is?