Question

“Policy-makers should not be given discretion to respond to recessionary shocks.” Summarize the arguments in favor and against this proposition.

Answer 1

If policy maker makes a policy to stabilize the economic situation people change their expectation about price, interest rate, and others. But if policy maker changes their decision after announcement then people in future cannot trust them. If policymakers try to implement any policy in future will not have effect as people will not change their expectation.

In the recession, policymaker announces to take expansionary fiscal policy. People expect the interest rate will be increased. they increase their aggregate demand. But now this policy is not implemented then people suffer loss. In future, if policymaker try to take an expansionary policy to combat recession people will not change aggregate demand so policy will not have any effect

So the given statement is TRUE.