In monetary policy, discretionary policymaking corresponds to the central bank seeking to influence or respond to momentary fluctuations in unemployment and inflation without a long-term strategy. For instance, when the UK government cut the VAT in … Typically, the idea behind this type of policy is to deliberately impact that trend, gradually moving the economy in a direction that is esteemed by government leadership as more beneficial to the jurisdiction. A rule involves the exercise of control over the monetary authority in a way that restricts the monetary authority’s actions. Some macroeconomists thus have argued in recent years that monetary policy should be ‘rule-based’ rather than discretionary, that is, Central Bankers strictly would have to follow some kind of monetary policy rule without the authority to deviate from it. Discretionary monetary policy can give rise to an inefficiently high rate of inflation. Tn the context of monetary policy, a rule is a restriction on the monetary authority’s discre-tion. Discretionary fiscal policy refers to government policy that alters government spending or taxes. Term discretionary monetary policy Definition: Explicit changes in the money supply and/or interest rates (monetary policy) that are made with the expressed goal of stabilizing business cycles, reducing unemployment, and/or lowering inflation. Stimulus spending adds to the money supply, but it creates a deficit adding to a country's sovereign debt. d. The Fed should follow a monetary policy rule. Activist monetary policy is the best way to address business cycles. The paper starts with the rules of the game under the gold standard. The idea of ‘rule-based’ monetary policy is actually relatively old. Discretionary policies refer to actions taken in response to changes in the economy, but they do not follow a strict set of rules; instead, they use subjective judgment to treat each situation in a unique manner. Monetary Policy vs. Fiscal Policy: An Overview . Discretionary Fiscal Policy Definition. Monetary policy and fiscal policy refer to the two most widely recognized tools used to influence a nation's economic activity. e. All of the above. This paper examines the case for rules rather than discretion in the conduct of monetary policy, from both historical and analytic perspectives. Explain how replacing a seasoned monetarist with a non-monetarist in the management of monetary policy affects “reputation” and “delegation” as tools of fighting inflation. a. Discretionary policy may be inconsistent when it does not change the initial conditions that create a disturbance, or shortsighted when a policy requires lags to materialize. Rules can directly limit the actions taken by a monetary authority. Its purpose is to expand or shrink the economy as needed. Economists are divided over whether rules or discretion is the best policy for managing the economy. Discretionary fiscal policy is a similar type of policy. would have a discretionary monetary policy. That will increase interest rates. Monetarists believe monetary policy is more effective than fiscal policy (government spending and tax policy). d. The natural rate hypothesis says that the unemployment rate should be A discretionary fiscal policy is a monetary policy that is created and initiated by a government entity as a means of dealing with events and trends that are taking place in the economy. c. Discretionary monetary policy is effective while discretionary fiscal policy is not.