In practice, short-term macroeconomic policy is mostly monetary policy conducted
by setting interest rates.
The Taylor rule summarizes how the Fed sets interest rates in response to deviations
from desired levels of inflation and output.
Lower interest rates stimulate aggregate demand.
Quantitatively, policy instruments can be set either by working backwards from
the desired target using estimates of multipliers in the economy (open-loop control)
or by making small changes and then readjusting the instrument (closedloop
control).
