Rules versus Discretion in Monetary Policy. Suppose that the government of Yaleland can fix the inflation level, p, by an appropriate choice of monetary policy. The rate of nominal wage increase, W , however, is set not by the government but by an employer-union federation. This federation would like real wages to remain unchanged; that is, if they could, they would set W = p. Specifically, given W and p, the utility of the federation is given by u(W , p) = W p 2 . For reasons that we do not need to go into here (but which might concern a Phillips curve), real output y in Yaleland is given by the equation y = 30 ( p W ). The government, perhaps reflecting its electorate, likes output more than it dislikes inflation. Specifically given y and p, the government's utility is given by v(y, p) = y p 2 30. The government chooses its monetary policy (and hence sets inflation) after observing the nominal wage increases set by the federation. Finally assume that 0 W 10 and 0 p 10