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IAI Actuarial Core Principles · Business Economics · Main economic schools and their key features

Which policy prescription is most consistent with monetarism and the Chicago School?

Monetarists favour a rule-based policy, such as a steady and predictable growth rate of the money supply, rather than discretionary fine-tuning. They argue policy lags are long and variable, so discretion tends to destabilise the economy.

  1. ATargeting a steady, predictable growth rate of the money supply instead of discretionary fine-tuningCorrect
  2. BUsing fiscal deficits to fine-tune demand every year
  3. CImposing price and wage controls to curb inflation
  4. DNationalising major banks to direct credit
  5. Setting interest rates to maximise short-run employment

Explanation

Friedman advocated a money growth rule because of long and variable policy lags that make discretionary fine-tuning destabilising. Fiscal fine-tuning and controls are Keynesian or interventionist approaches.

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