Question

8. Conducting monetary policy so that the federal funds rate = p + 0.5(p – 2)...

8.

Conducting monetary policy so that the federal funds rate = p + 0.5(p – 2) + 0.5 (GDP gap), where the federal funds rate is the nominal federal funds interest rate, p 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.
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Answer #1

In contrast to active (or discretionary) policy is passive policy (or policy by rule). Under this system, macroeconomic policy is conducted according to a preset series of rules. These rules take into account many macroeconomic variables and dictate the best course of action given these conditions. For instance, a passive policy may follow the rule that in order to stabilize the economy the interest rate must be dropped one point whenever the nominal GDP falls one percent.

Correct Ans - B

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