Examples of discretionary policy in the following topics:
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- Discretionary policies refer to subjective actions taken in response to changes in the economy.
- A discretionary policy is supported because it allows policymakers to respond quickly to events.
- A rule-based policy can be more credible, because it is more transparent and easier to anticipate, unlike discretionary policy.
- This can create compounding issues related to the discretionary policy enacted.
- A compromise between strict discretionary and strict rule-based policy is to grant discretionary power to an independent body.
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- In fiscal policy, there are two different approaches to stabilizing the economy: automatic stabilizers and discretionary policy.
- Discretionary policy is a macroeconomic policy based on the judgment of policymakers in the moment, as opposed to a policy set by predetermined rules.
- In practice, most policy changes are discretionary in nature.
- With discretionary policy there is a significant time lag.
- Discretionary policies can target other, specific areas of the economy.
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- Discretionary fiscal policy relies on getting the timing right, but this can be difficult to determine at the time decisions must be made.
- A nation can respond to economic fluctuations through automatic stabilizers or through discretionary policy.
- With discretionary fiscal policy, timing plays a very significant role.
- Discretionary policy often requires that a set of laws must be passed through a legislature.
- Explain the effect of timing on the use of fiscal policy tools
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- Expansionary monetary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates.
- Monetary policy uses a variety of discretionary tools to control one or both of these to influence outcomes like economic growth, inflation, exchange rates with other currencies, and unemployment.
- For example, if the central bank is implementing expansionary policy but is committed to keeping interest rates low, the central bank needs to convey this policy with credibility, otherwise economic agents may assume that expansionary policy will lead to inflation and begin augmenting behavior to initiate the outcome expected, higher inflation.
- The increase in the money supply is the primary conduit for expansionary monetary policy.
- Assess the value of discretionary expansionary monetary policy and the associated shortcomings.
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- Unlike the cyclical budget deficit, a structural deficit is the result of discretionary, not automatic, fiscal policy.
- While automatic stabilizers don't actually shift the aggregate demand curve (because transfer payments and taxes are already built into aggregate demand), discretionary fiscal policy can shift the aggregate demand curve.
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- Discretionary income is disposable income minus all payments that are necessary to meet current bills.
- Discretionary income = Gross income - taxes - all compelled payments (bills)
- Disposable income is often incorrectly used to denote discretionary income.
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- Expansionary policy shifts the aggregate demand curve to the right, while contractionary policy shifts it to the left.
- Expansionary fiscal policy is used to kick-start the economy during a recession.
- A contractionary fiscal policy is implemented when there is demand-pull inflation.
- Contractionary fiscal policy shifts the AD curve to the left.
- Expansionary policy shifts the AD curve to the right, while contractionary policy shifts it to the left.
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- Two key limits of fiscal policy are coordination with the nation's monetary policy and differing political viewpoints.
- While fiscal policy can be a powerful tool for influencing the economy, there are limits in how effective these policies are.
- Fiscal policy and monetary policy are the two primary tools used by the State to achieve its macroeconomic objectives.
- Policy makers are viewed to interact as strategic substitutes when one policy maker's expansionary (contractionary) policies are countered by another policy maker's contractionary (expansionary) policies.
- How effective fiscal policy is depends on the multiplier.
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- When the economy is not at a steady state, the government and monetary authorities have policy mechanisms to move the economy back to consistent growth.
- If the economy needs to be slowed, these policies are referred to as contractionary and if the economy needs to be stimulated the policy prescription is expansionary.
- Expansionary fiscal policy involves government spending exceeding tax revenue, and is usually undertaken during recessions.
- Similarly, contractionary monetary policy is the opposite of expansionary monetary policy and occurs when the supply of loanable funds is limited, to reduce the access and availability to relatively inexpensive credit.
- Identify how changes in monetary and fiscal policy can manage the business cycle, and why that is desirable
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- Expansionary fiscal policies, which are usually implemented during recessions, attempt to increase economic demand.
- Fiscal policy is a broad term, describing the policies enacted around government revenue and expenditure in order to influence the economy.
- Expansionary fiscal policies involve reducing taxes or increasing government expenditure.
- Increasing government spending, creating a budget deficit, and financing the shortfall through debt issuance are typical policy actions in an expansionary fiscal policy scenario.
- Evaluate the pros and cons of fiscal policy intervention during recession