Explain why discretionary monetary policy is thought to be inflationary, and discuss the possible solutions to...

Explain why discretionary monetary policy is thought to be inflationary, and discuss the possible solutions to this problem.

please discuss in details.

Solutions

Expert Solution

Discretionary monetary policy is when fed reacts dynamically to make quick decisions, thus instead of analyzing long term trends or for a long term period, fed tries to work on short term basis, thereby not taking into account that one can't decide immediately, one needs time to analyse how that effect is going to play out. Such dynamic changes don't give the economy enough time to work out and find the equilibrium, thereby leading to confusion and inflationary measures. It is based on subjective analysis which does not make it universal per se. A government may increase interest rates, to bring inflation under control, but then it may immediately relax its stance, making the policy ineffective. Thus possible solutions are that the government uses a mix of rule based and discretionary policy, or not use the discretionary policy at all, as rule based policy is easier to anticipate and is more transparent.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Discuss how does a rule-based monetary policy differ from discretionary monetary policy (that is, monetary policy...

Discuss how does a rule-based monetary policy differ from discretionary monetary policy (that is, monetary policy not based on a rule)? What are some of the arguments for each?

Discuss the following statement. Monetary policy can be inflationary without being expansionary.

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

Define Fiscal and Monetary policy. Explain how each attempts to correct a recessionary and an inflationary...

Define Fiscal and Monetary policy. Explain how each attempts to correct a recessionary and an inflationary gap. Analyze through the comparison and contrast the strength and weakness of each policy addressing 5 macroeconomic issues

6. The economy is in an inflationary gap. a) Describe the appropriate monetary policy and the...

6. The economy is in an inflationary gap. a) Describe the appropriate monetary policy and the steps the Bank of Canada takes. b) Draw the AS-AD model, starting in a recessionary gap. Show the effect of the appropriate monetary policy on the diagram. What happens to real GDP, unemployment, and inflation? c) As a result of the monetary policy, do unemployment and inflation move in the same direction or opposite directions?

Please explain the difference between monetary policy and fiscal policy AS detail as possible Thanks

#1 Please identify what they are (i.e., discretionary fiscal policy, monetary policy, or automatic stabilizer) and...

#1 Please identify what they are (i.e., discretionary fiscal policy, monetary policy, or automatic stabilizer) and explain why. 1a) A terrible recession occurs as a result of a bubble in the housing market bursting, and government-funded unemployment compensation is paid out to laid-off workers. 1b) As the economy heats up, the resulting increase in equilibrium GDP results in higher income tax payments, which dampen consumption spending somewhat. 1c) To stem an overheated economy, the president, using special powers granted by...

Differentiate between fiscal and monetary policy. Demonstrate the mechanics of discretionary fiscal policy within the Keynesian...

Differentiate between fiscal and monetary policy. Demonstrate the mechanics of discretionary fiscal policy within the Keynesian framework.

Question 3: Monetary Policy Suppose the economy is in an inflationary gap, and the Fed responds...

Question 3: Monetary Policy Suppose the economy is in an inflationary gap, and the Fed responds by conducting a contractionary monetary policy. b. Explain what the Fed does if it conducts open market operations to control inflation. c. Explain the effects of this monetary policy on interest rates, business investments, consumption spending, the value of the U.S. dollar, and the value of net exports.

Suppose a country is facing an inflationary gap, and the Central wants to use monetary policy...

Suppose a country is facing an inflationary gap, and the Central wants to use monetary policy to stabilize the economy. What kind of policy should it follow? How will it impact bond prices, interest rates, investment, the exchange rate, net exports, real GDP, and the price level. Illustrate your analysis graphically with explanations

Subjects