If the central bank has discretion to make policy, it may create economic fluctuations that reflect the electoral calendar. This is called the political business cycle.

Question

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The political business cycle theory suggests that elected officials (or those who influence monetary policy, like a central bank with discretion) may manipulate the economy to enhance their chances of re-election, leading to economic fluctuations that align with the electoral calendar.

If the Central Bank Has Discretion to Make Policy, It