Conducting monetary policy so that the nominal interest rate = $\pi$ + 0.5($\pi$ - 2)+ 0.5(GDP gap),where $\pi$ is the annual inflation rate and GDP gap is the percentage shortfall of real GDP from its natural level,is an example of:
A) an active policy rule.
B) a passive policy rule.
C) discretionary policy.
D) an automatic stabilizer.

Question

Quizplus · Accepted Answer

This is an example of an active policy rule as it sets a specific target for the nominal interest rate based on the current inflation rate and the GDP gap. A passive policy rule would not have a specific target and would instead adjust monetary policy based on changes in the economy. Discretionary policy would involve making ad hoc decisions based on the current economic situation, while an automatic stabilizer would be a policy that is automatically triggered by changes in the economy without the need for intervention.

Conducting Monetary Policy So That the Nominal Interest Rate = π\piπ

Conducting Monetary Policy So That the Nominal Interest Rate = $\pi$