This post must be seen as an addendum to my previous post. Here I show that there is a perfect correspondence between my understanding of the stance of monetary policy (the “balancing act” between money supply & money demand) and the nominal variables that are associated to it; nominal aggregate spending (NGDP) growth and inflation.
I´ll leave the reader to write the story based on the images presented. The important point to realize is that if monetary policy manages to provide nominal stability (a stable growth of NGDP along a determined level path), real output and unemployment the two major real macro variables that are on everyone´s mind, real growth and unemployment, will “fall in line”!
How is the target rate of NGDP chosen?