The theory of macroeconomic policy that has dominated thought and policy‐making since the later 1930s is essentially one‐dimensional in the closed economy (and two dimensional in the open economy). That is to say, in a closed economy we have been taught to operate on the level of demand ‐ with any or every macroeconomic instrument. When inflation is too rapid the aim has been to use (some or all of) our policy instruments to reduce demand; and when unemployment is too high we have learned to raise it.
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