Why Should Monetary Policy Be Made by Rule Rather Than

question 9

Multiple Choice

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

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

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Definitions:

Negotiated

The process of discussing terms in order to reach a mutual agreement, often used in the context of contracts, salaries, and business deals.

Fixed Amount

A specified sum that does not vary or change under specified conditions.

Principal

A main party to a transaction, such as the owner of a business or the party who has authorized an agent to act on their behalf.

Interest

The cost of borrowing money, typically expressed as a percentage of the principal, paid by the borrower to the lender for the use of their money.