A question from monetary policy reading 28

Fed’s decision not to change interest rates in response to cost-push inflation following an oil supply shock is most likely an example of A fixed rule policy B discretionary policy C feed back rule policy D acommodation policy

My guess is A, fixed rule policy. They do nothing, no change to demand occurs, stagflation may occur, and eventually the price of oil will fall.

A) fixed rule policy right from the school of Milton Friedman. Unlike helicopter Ben who panders to the market and it probably ensuring us all the lovely experience of higher inflation, the fixed rule policy will only incrementally increase the money supply and not respond to cries for an active monetary policy.

My answer is also A. Now since this topic has come up, I have a question related to it. I understand what a fixed rule/feedback rule policy is. Also know that discretionary policy is ‘similar’ to feedback rule. Could anyone pls suggest an example for discretionary rule policy ?

it’s kind of a misnomer, there’s not “rules” to follow but the the policy name really just referes to the discretion the Fed has in making a decision. In other words the discretion regarding the size of a fed move, for example whether to cut rates 25bps or 50 bps base on the imperfect information available.

I would also pick A, but the answer is B,

yeah, B does make sense if you don’t read into the question like i did. The question could have been worded better if the intent was to illustrate the differences between a fix rule policy and discretionary policy.

Please tell me how… Fixed Rule policy according to my level 1 text from last year: “Fixed-rule policies leave the price level and real GDP to fluctuate in the face of demand shocks and supply shocks.” This exact example is in reading 28 on page 448. Discretionary policy: "responds to the state of the economy in a possibly unique way that uses all the information available, including perceived lessons from past “mistakes”.

simple. if the Fed makes a DECISION to do (or not to do) something opposed to following a fixed rule policy were no decisions are made. again though this question could have been worded better.

i don’t like the question either but a similar question might come up.