Discretionary Policy

Definition

Discretionary Policy refers to government economic policies that are implemented through active intervention by policymakers rather than being automatic adjustments. These policies require deliberate decisions and actions to influence the economy in desired directions and typically include adjustments to the money supply, interest rates, tax rates, and public spending.

The Federal Reserve Board’s use of its powers to adjust the money supply and set the discount rate are classic examples of discretionary policies. These measures are taken to achieve specific economic objectives, such as controlling inflation, stimulating economic growth, or reducing unemployment.

Examples

1. Monetary Policy Adjustments: The Federal Reserve often uses discretionary policy to manage economic stability by altering the federal funds rate, influencing the money supply, and engaging in open market operations.
2. Fiscal Policy: Government decisions to increase or decrease public spending and to adjust tax rates to either stimulate economic growth or rein in inflation represent discretionary fiscal policies.
3. Economic Stimulus Packages: During times of economic downturn, governments may introduce stimulus packages aiming to boost economic activity through increased spending or tax incentives.

Frequently Asked Questions (FAQs)

Q1: What is the primary goal of discretionary policy?

• The primary goal of discretionary policy is to manage economic stability by influencing key economic variables such as inflation, unemployment rates, and economic growth.

Q2: How does discretionary fiscal policy differ from automatic stabilizers?

• Discretionary fiscal policy requires active government intervention (e.g., new spending bills) while automatic stabilizers (e.g., unemployment benefits) function automatically without needing new legislation.

Q3: Can discretionary policies have immediate effects on the economy?

• The effects of discretionary policies can vary in timing. Monetary policies may have more immediate financial market impacts, while fiscal policies often take longer to influence economic activities.

Related Terms

• Automatic Stabilizers: Economic policies and programs that automatically help stabilize an economy without active intervention, such as progressive income taxes and unemployment benefits.
• Expansionary Policy: A form of discretionary policy aimed at stimulating economic activity through increasing the money supply or reducing taxes.
• Contractionary Policy: A form of discretionary policy aimed at slowing down economic activity, often through reducing the money supply or increasing taxes.

Online References

1. Federal Reserve’s Monetary Policy Tools
2. Government Economic Policy: Britannica

Suggested Books for Further Studies

1. “Macroeconomics” by N. Gregory Mankiw: This textbook provides comprehensive details on macroeconomic principles, including fiscal and monetary policies.
2. “Principles of Economics” by Karl E. Case, Ray C. Fair, and Sharon M. Oster: This book offers insights into both micro and macroeconomic principles, detailing various economic policies.
3. “The Federal Reserve and the Financial Crisis” by Ben S. Bernanke: This book explores the role of the Federal Reserve in managing economic crises through discretionary policies.

Fundamentals of Discretionary Policy: Economics Basics Quiz

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