What are the primary arguments in favor of a rules approach, and what are the primary arguments in favor of a discretion approach?
What will be an ideal response?
The primary arguments in favor of a rules approach include:
- the potential for loss of central bank credibility, as which occurred during the 1970s when the Fed did not follow rules and instead repeatedly switched between the goals of fighting inflation and keeping real GDP close to potential GDP
-the idea that policy rules avoid the time inconsistency problem
-following a monetary policy rule gives the central bank credibility
-following a rule can reduce uncertainty about monetary policy and improve economic performance by allowing households and firms to more easily plan for the future and by providing discipline for central banks
The primary arguments for discretion include:
-rules cannot predict new and unexpected events, so policymakers must be free to use all available information when setting policy
-rules often assume that key economic values are constant, but this is probably not true in reality, so rules can potentially increase economic instability
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Most economists believe that a zero rate of unemployment
A) is obtainable with the correct monetary policy. B) would result in a better functioning economy. C) is inconsistent with a well-functioning economy. D) is obtainable only if the inflation rate is also zero.
Along a straight-line downward-sloping demand curve, elasticity is
a. constant, but its value cannot be determined without measurement b. constant and equal to an absolute value of one c. greater at higher prices d. greater at lower prices e. greater in the middle
On holiday weekends thousands of people picnic in state parks. Some picnic areas become so overcrowded the benefit or value of picnicking diminishes to zero. An overcrowded picnic area is an example of
a. a private good. b. a club good. c. a Tragedy of the Commons. d. public good.
If global prices are lower than domestic prices, the short-run Phillips curve is likely to be horizontal.
Answer the following statement true (T) or false (F)