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:

Preferences

Individual choices or prioritizations that indicate the degree of personal satisfaction or value someone derives from various options.

Free-Rider Problem

A situation in which individuals consume a resource or service without contributing to its cost, commonly occurring in the provision of public goods.

Noise Pollution

Unwanted or harmful outdoor sound created by human activities, such as transportation, industrial processes, and construction.

Technological Improvements

Innovations and advancements in technology that enhance productivity, efficiency, and capacity in production processes.