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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Advocates for setting monetary policy by rule rather than discretion often argue that

a. central bankers with discretion are tempted to renege on their announced commitments to low inflation.

b. central bankers following a rule will be more responsive to the needs of the political process.

c. fiscal policy is a much better tool for economic stabilization than is monetary policy.

d. it is sometimes useful to give the economy a burst of surprise inflation.

To determine

Argument against setting policy by discretion.

Explanation

Option (a):

Due to the time inconsistency of a policy, central bankers with discretion are tempted to renege on their announced commitments to achieve lower inflation. Thus, option ‘a’ is correct.

Option (b):

Central bankers setting policy by rule prevents the political business cycle. Thus, option ‘b’ is incorrect.

Option (c):

Advocates of an active fiscal policy view the economy as inherently unstable and believe that fiscal policy can manage aggregate demand to offset the inherent instability...

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