Question

This week we are studying monetary policy. There are two major opinions on what the appropriate monetary policy should be: activists argue that monetary policy should be deliberately used to smooth out the business cycle while non-activists argue against discretionary monetary policy. Discuss some of the reasons why the activists favor intervention and the non-activists do not.

Answer 1

Discretionary monetary policy indicates,the deliberate actions undertaken by the federal reserve to regulate money supply, or it is the ability of the federal reserve to influence the economy by manipulating the currency levels which in turn affect the interest levels,It can also be refered as constrained monetary policy, for the Fed make quick decisions using the tools available,to influence economic conditions.

The activists favour a discretionary monetary policy for it allows,the policy makers to respond quickly to events.A non discretionery approach might not allow the required flexibility and limit the choices.Discretionary policy use a subjective judgement to treat a given situation in a unique manner.However,discretionary policy can be subject to dynamic inconsistancy.For example,the policy makers increase the interstt rates to control inflation,but they can change the policy at another requirement,making it ineffective and incredible.

But non activists favour for non discretionary monetary policy for its simplicity,predictability,credibility and insulation from political pressures.Policy is based on indicator events in the economy and the policy is expected and carried out in a timely manner.