Economic Analysis and Policy_Coursework Essay Example | Topics and Well Written Essays - 1000 words

Economic Analysis and Policy_Coursework - Essay ExampleIn damage of agents utility, discretion based solutions are normally the best. On the some other hand, constitution options that are based on rules usually have belittled room for policy errors. However, such an approach requires a lot of confidence that the variables will perform as intended without any challenges. This is certainly difficult to distinguish for inflation staining curiously in the identification of financial stability (Langdana, 2009). Indeed, most rule-based approaches have faced many challenges especially when applied as an inflation target framework. In this respect, a discretionary framework is always appropriate in addressing the exsert. It allows policy makers to learn much from the interaction between various relevant stakeholders. Nevertheless, it should be realized that the adaptability and flexibility of discretion comes with its own share of costs. There is limited predictability of the decision in addition to a tendency toward forbearance as policy makers are tempted to postpone backfiring decisions. In most rule-based approaches, policy reactions are normally left to some pre-defined automatic triggers and mechanisms. However, the use of rules might be difficult especially for a new policy which should be used across the world (Peston, 2010). (Question b) Indeed, the Taylor rule has greatly revolutionized the manner in which policy makers and central banks approach the issue of monetary policy. It frames policy actions in line with the various incoming information regarding economic conditions. In this case its contrasts the traditional period-by-period optimization problem. The rule has greatly brought into focalisation the need for adjusting policy rates more than one-for-one in responding to increased inflation. The rule is therefore used in adjusting prudent interest rates which can wait on in stabilizing the economy both in the short term and maintain growth in th e long term. This is much opposed to inflation targeting which fundamentally focuses on estimation of the inflation rates and attempting to fix the situation through interest rates (Barro, 2005). The attractiveness of the rule arises out of its ability to foster hurt stability and ensure full employment through a reduction of uncertainty. It further increases the credibility of future actions of the central bank. The rule might further suspend most inefficiency associated with time inconsistency through the use of discretionary policy. The Taylor rule indeed provided a compromise between the various competing schools of thought in a proper language often lacking in rhetorical passion. A recent application of the Taylor rule was made by the Federal Open food market Committee (FOMC) after inflation was seen to have risen by 2%. The rule provided a quantitative prescription on how the interest rates should be increased to address this change. Indeed, the Taylor rule has been importa nt in addressing some of the challenges which conventional inflation targeting cannot reach. However, the rule also has its own challenges and is often used together with other approaches in real economic situations (Prachowny, (2011). Microeconomics (Question a) It is certainly true that firms prefer making more profits to less. Profit is certainly a very important judgment in the operations of a