Question

Using the concepts of fiscal/monetary policies, active/passive policies, and policy by rule/discretion, indicate whether the policy is a monetary or a fiscal policy, an active or a passive policy, and a policy by rules or with discretion for each of the following policies a.he central bank follows a policy of allowing the money supply to grow at a constant 4 percent per year; b. the government follows a policy of keeping government spending over a calendar year equal to government revenue over the calendar year; c. the central bank uses judgment to adjust the growth of the money supply based on expectations of what will happen to output and inflation over the next five years. d. the central bank follows a policy of adjusting the money supply according to a formula based on deviations of unemployment from the natural rate of unemployment.

Answer 1

Solution -

A.The central bank follows a policy of allowing the money supply to grow at a constant rate of 4 percent per year

Answer - a) Monetary policy; passive; rule

B.The government follows a policy of keeping government spending over a calendar year equal to government revenue over the calendar year

Answer -Fiscal Policy ; passive ;rule

C. the central bank uses judgment to adjust the growth of the money supply based on expectations of what will happen to output and inflation over the next five years

Answer -monetary policy ; acive ; discreation

D. the central bank follows a policy of adjusting the money supply according to a formula based on deviations of unemployment from the natural rate of unemployment.

Answer - monetary ; active ; rule.

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