Which of the following would be an example of running monetary policy by rules?
A) A 5 percent increase in money supply automatically leads to a 2 percent increase in real GDP.
B) An increase in money supply automatically leads to an increase in inflation.
C) The Fed will increase money growth to different levels, depending on the severity of the recession.
D) A 1 percent drop in real GDP will automatically elicit a 2 percent increase in money supply.

Question

Quizplus · Accepted Answer

Running monetary policy by rules involves setting clear and specific guidelines that dictate how the central bank will adjust monetary policy in response to changes in the economy. Option D is an example of such a rule, as it specifies that a 1 percent drop in real GDP will result in a 2 percent increase in the money supply. This provides a clear and predictable response to changes in the economy, which can help to stabilize expectations and promote economic stability. Options A and B suggest a deterministic relationship between monetary policy and economic outcomes, which may not always hold true in practice. Option C involves discretionary decision-making by the Fed, rather than following a clear set of rules.

Which of the Following Would Be an Example of Running