You learned in Chapter 1 that inflation speeds up when actual real GDP exceeds natural real GDP. Suppose that policymakers believe actual real GDP exceeds natural real GDP and fear that inflation will rise. Compare the effects on private sector spending of the following two policies:
(a) Only monetary policymakers are able to take actions to bring actual and natural real GDP in line with one another.
(b) Monetary and fiscal policymakers are able to jointly adopt a “tight money, tight fiscal” policy mix in an effort to reduce actual real GDP relative to natural real GDP.