Why should monetary policy be made by rule rather than discretion?
A) There is a clear consensus among economists about what a good monetary policy rule would be.
B) Rules would eliminate the political business cycle.
C) Rules respond to any random shock in the economy.
D) Rules create time inconsistency.

Question

Quizplus · Accepted Answer

Making monetary policy by rule rather than discretion would eliminate the political business cycle, where politicians manipulate monetary policy to boost the economy leading up to elections. This would increase the credibility and transparency of monetary policy, which would benefit the economy in the long run. While there may not be a clear consensus among economists about what a good monetary policy rule would be and rules may not respond to every random shock in the economy, the benefits of eliminating political influence outweigh these potential drawbacks. The inclusion of time inconsistency as a choice is misleading as rules create commitment and reduce the likelihood of time inconsistency.

Why Should Monetary Policy Be Made by Rule Rather Than