Question

In: Economics

why do people favor the rules-based monetary policy, not discretionary policies

why do people favor the rules-based monetary policy, not discretionary policies

Solutions

Expert Solution

Rules-based monetary policy - This type of policy is created from the rules that guide the central bank to work according to the rules and regulations. The central bank must have to follow the rule-based policy. The supply of money changes here according to the rules and guidelines.
Discretionary policies - It refers to the policies which help the authority body (federal reserve in the US) to take proper actions in any economic conditions. This type of policy is based on the opinion of the policymaker and was preplanned.

People favor the rules-based monetary policy, not discretionary policies because rules-based policies are more reliable and easy to understand as it is based on some rules (guidelines). It is also not based on the judgment or opinion of the policymakers that's why people like this type of policy.
On the other hand, discretionary policies are not easy or transparent as compared to rule-based monetary policies. People do not favor this type of polices because it is based on the opinion or views of policymakers.


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