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d. The Fed should follow a monetary policy rule. That will increase interest rates. Discretionary monetary policy can give rise to an inefficiently high rate of inflation. would have a discretionary monetary policy. This paper examines the case for rules rather than discretion in the conduct of monetary policy, from both historical and analytic perspectives. d. The natural rate hypothesis says that the unemployment rate should be Tn the context of monetary policy, a rule is a restriction on the monetary authority’s discre-tion. Economists are divided over whether rules or discretion is the best policy for managing the economy. Monetary policy and fiscal policy refer to the two most widely recognized tools used to influence a nation's economic activity. Explain how replacing a seasoned monetarist with a non-monetarist in the management of monetary policy affects “reputation” and “delegation” as tools of fighting inflation. Discretionary Fiscal Policy Definition. Monetarists believe monetary policy is more effective than fiscal policy (government spending and tax policy). Activist monetary policy is the best way to address business cycles. A discretionary fiscal policy is a monetary policy that is created and initiated by a government entity as a means of dealing with events and trends that are taking place in the economy. a. Stimulus spending adds to the money supply, but it creates a deficit adding to a country's sovereign debt. Rules can directly limit the actions taken by a monetary authority. Typically, the idea behind this type of policy is to deliberately impact that trend, gradually moving the economy in a direction that is esteemed by government leadership as more beneficial to the jurisdiction. Monetary Policy vs. Fiscal Policy: An Overview . Discretionary fiscal policy is a similar type of policy. The idea of ‘rule-based’ monetary policy is actually relatively old. A rule involves the exercise of control over the monetary authority in a way that restricts the monetary authority’s actions. In monetary policy, discretionary policymaking corresponds to the central bank seeking to influence or respond to momentary fluctuations in unemployment and inflation without a long-term strategy. Term discretionary monetary policy Definition: Explicit changes in the money supply and/or interest rates (monetary policy) that are made with the expressed goal of stabilizing business cycles, reducing unemployment, and/or lowering inflation. Some macroeconomists thus have argued in recent years that monetary policy should be ‘rule-based’ rather than discretionary, that is, Central Bankers strictly would have to follow some kind of monetary policy rule without the authority to deviate from it. Discretionary fiscal policy refers to government policy that alters government spending or taxes. Its purpose is to expand or shrink the economy as needed. 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