Why Should Monetary Policy Be Made by Rule Rather Than

question 12

Multiple Choice

Why should monetary policy be made by rule rather than discretion?

• A) The economy is subject to a variety of random shocks.
• B) Monetary policymakers are now allowed undisciplined discretion.
• C) It is not clear how important political business cycles have been in the past.
• D) Central banks can achieve credibility over time by backing up their words with deeds.

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Definitions:

Aggregate Demand

The complete need for goods and services across an economy at an established price level within a specific period.

Government Spending

The total amount of money spent by the government on various services, infrastructure projects, and welfare programs.

Marginal Propensity

A measure of how much an individual's or household's consumption changes when their income changes by one unit.

Multiplier

In economics, it refers to the factor by which gains in total output are greater than the change in spending that caused it, often associated with fiscal policy.