When the fed responds to a negative spending shock by increasing the money supply, it is using: a discretionary policy
What kind of policy is considered discretionary?
- Macroeconomically speaking, a discretionary policy is one that is based on the impromptu judgment of policymakers rather than one that is governed by established norms.
- For instance, a central banker might decide interest rates on an individual basis rather than relying on a predetermined rule, such as Friedman's k-percent rule, an inflation goal based on the Taylor rule, or a target for nominal income.
- In reality, most policy decisions are up to the individual.
- Discretionary fiscal policy refers to adjustments in tax rates and/or expenditure levels made by the government. For instance, lowering the VAT in 2009 to increase expenditure.
- When the Fed uses a discretionary policy to increase the money supply in response to a negative spending shock, it is discretionary policy.
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