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.

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

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