2. Rules versus discretion This question addresses the issue of whether monetary

Question

2. Rules versus discretion This question addresses the issue of whether monetary policy should be made by discretionary policy or be implemented according to a set of rules. Which of the following statements reflect arguments in favor of policy by rule rather than discretion? Check all that apply. Monetary rules reduce the flexibility of the Federal Reserve. It is impossible for a policy rule to consider all the possible scenarios and specify, in advance, the right policy response. It is better to appoint qualified individuals who will respond to any situation as best they can Monetary rules may lead to a lower sacrifice ratio because the public is more confident that the Federal Reserve will keep inflation low The time inconsistency of policy problem can be eliminated by having the central bank commit to a particular policy rule.

Explanation / Answer

Answer is C
Monetary rules may lead to a lower sacrifice ratio because the public is more confident that the Federal Reserve will keep inflation low.
The time inconsistency of policy problem can be eliminated by having the central bank commit to a particular policy rule.This statement clearly states that the monetary policy should be followed by rule.

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