ABSTRACT
If the problem of the number of goals is pursued further, the distinction between goals and tools starts to break down. Goals are what the government cares about, and tools are what it is prepared to manipulate to reach those goals. Fiscal policy, however, contains government expenditure programs, about which the voters care a great deal. It also includes taxes, about which people have strong opinions which they feel free to express on election day. Voters do not want programs from which they benefit to be turned on and off over the business cycle, and they want their taxes to be stable and therefore predictable. Fiscal policy contains large elements of “goal,” and is often unavailable to deal with short-term businesscycle problems, which seems to leave monetary policy as the only short-term macro-
The policy assignment approach to dealing with the two Meade conflict cases can also be seen with the IS/LM/BP graph that was introduced earlier. If, for example, a country faces a domestic recession and a balance-of-payments deficit (case 4), an expansionary fiscal policy is used to escape the recession, and tight money is used to adjust the payments deficit (Figure 16.16). The tightening of monetary policy shifts LM to the left, whereas the more expansionary budget moves IS to the right. The goal is to have them cross on the BP line above the desired level of GNP, represented in the figure as Yfe.
