What types of rules for monetary policy may be sensible for policymakers to consider? What is the advantage of using rules over discretion? What problems might there be with rules?
What will be an ideal response?
One possible rule is a constant money growth rule, as proposed by Milton Friedman and the monetarists. It has the advantage of being based on economic theory and using observable data. Following such a rule might be preferable to discretion, because people would understand the Fed's rule and form expectations accordingly, which would in turn reduce the costs of disinflation. The problem with such a rule could come if there were structural changes in the economy, such as a change in money demand. In such a case, the rule's lack of flexibility could cause the Fed to follow inappropriate policies.
You might also like to view...
In the United States in 2014, the percentage of people with some form of health insurance was about
A) 10%. B) 36%. C) 55%. D) 90%.
The Fed and the government are working against each other if, as the government cuts taxes to promote economic growth, the Fed
A. sells government securities. B. buys government securities. C. lowers the discount rate. D. lowers the prime rate.
Rent seeking lowers profits by
a. shifting the market demand curve to the right b. shifting the market supply curve to the left c. shifting the ATC curve upward d. shifting the ATC curve downward e. flattening the marginal revenue curve
In general, the price elasticity of demand for milk will be less than that for Apple's iPod
Indicate whether the statement is true or false