Question

3. For each of the following policies indicate whether the policy is: 1. A monetary or a fiscal policy. 2. An active or a passive policy. 3. A policy by rules or with discretion. (4 total points, 1 point each)

A. The central bank follows a policy of allowing the money supply to grow at a constant 4% per year.

B. A government follows a policy of keeping government spending over a calendar year equal to government revenue over the calendar year.

C. The central bank uses judgment to adjust the growth of the money supply based on expectations of what will happen to output and inflation over the next five years.

D. The central bank follows a policy of adjusting the money supply according to a formula based on deviations of unemployment from the natural rate of unemployment.

Answer 1

As we know that there are two main types of policies available to the government that is monetary policy and fiscal policy.Fiscal policy refers to the use of government spending and tax policies to influence economic conditions. Fiscal policy is largely based on ideas from John Maynard Keynes, who argued governments could stabilize the business cycle and regulate economic output.

The Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.

A). The correct option is(monetary policy).

As money supply falls under monetary policy.

B). The correct option is( Fiscal policy).

Government spending falls under fiscal policy.

C). The correct option is (Active fiscal policy).

Active policy relies on the judgment and character of policymakers to pursue the optimal long-term policies for the economy.

D). The correct option is (A policy by discretion).

It refers to the Fed's ability to react dynamically to economic conditions and make quick decisions, as opposed to only using the tools at its disposal when prearranged thresholds are reached.

Hope you got the answer.

Kindly comment for further explanation.

Thanks!