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
- 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.
- 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.
- 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
Suggested Books for Further Studies
- “Macroeconomics” by N. Gregory Mankiw: This textbook provides comprehensive details on macroeconomic principles, including fiscal and monetary policies.
- “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.
- “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
### What is a key characteristic of discretionary policy?
- [x] It requires active intervention by policymakers.
- [ ] It occurs automatically without any legislation.
- [ ] It always involves reducing taxes.
- [ ] It only affects monetary supply.
> **Explanation:** Discretionary policy requires active intervention by policymakers to influence the economy as opposed to policies that adjust automatically.
### Which entity commonly implements discretionary monetary policies in the United States?
- [ ] The Department of Commerce
- [ ] The Federal Bureau of Investigation
- [x] The Federal Reserve Board
- [ ] The Department of the Treasury
> **Explanation:** The Federal Reserve Board commonly implements discretionary monetary policies in the U.S., such as setting the discount rate and changing the money supply.
### Which of the following actions is an example of discretionary fiscal policy?
- [ ] Automatic income tax deductions
- [x] Passing a new spending bill for infrastructure
- [ ] Adjusting unemployment benefits automatically
- [ ] Natural market adjustments
> **Explanation:** Passing a new spending bill for infrastructure is an example of discretionary fiscal policy as it involves active intervention to influence economic activity.
### What is the main difference between discretionary fiscal policy and automatic stabilizers?
- [ ] Discretionary policy cannot influence the economy immediately.
- [ ] Automatic stabilizers require new legislation.
- [x] Discretionary fiscal policy requires active government intervention.
- [ ] Automatic stabilizers only work in times of recession.
> **Explanation:** Discretionary fiscal policy requires active government intervention and decision-making, unlike automatic stabilizers which function without new legislative actions.
### Why may the effects of discretionary policies vary in timing?
- [ ] All policies affect the economy immediately.
- [x] Monetary policy effects can be immediate whereas fiscal policy effects often take longer.
- [ ] Discretionary policies have no real impact.
- [ ] Timing does not change with type of policy.
> **Explanation:** The effects can vary; monetary policies can impact financial markets more quickly while fiscal policies usually take more time to influence broader economic activities.
### How are economic stimulus packages categorized?
- [ ] Automatic stabilizers
- [x] Discretionary fiscal policies
- [ ] Non-intervention measures
- [ ] Neutral fiscal policies
> **Explanation:** Economic stimulus packages are categorized as discretionary fiscal policies due to requiring active decisions and interventions by the government.
### During a recession, which discretionary policy action might a government take to stimulate growth?
- [ ] Increase taxes substantially
- [ ] Reduce public spending
- [x] Implement a fiscal stimulus package
- [ ] Increase interest rates
> **Explanation:** Implementing a fiscal stimulus package is a discretionary policy action aimed at stimulating growth during a recession through increased government spending or tax incentives.
### What type of discretionary policy might the Federal Reserve use to curb inflation?
- [x] Raising interest rates
- [ ] Reducing taxes
- [ ] Increasing unemployment benefits
- [ ] Lowering the money supply
> **Explanation:** To curb inflation, the Federal Reserve may raise interest rates as a form of discretionary monetary policy.
### Which of the following is a goal that both discretionary fiscal and monetary policies might share?
- [ ] Reducing national exports
- [x] Stimulating economic growth
- [ ] Lowering the national debt
- [ ] Increasing trade tariffs
> **Explanation:** Both types of discretionary policies often aim to stimulate economic growth through either fiscal measures like government spending or monetary measures like adjusting interest rates.
### Why might governments prefer discretionary policies during economic crises?
- [ ] They always work faster than automatic stabilizers.
- [x] They provide targeted interventions for specific economic issues.
- [ ] They are easier to implement.
- [ ] They do not influence the budget.
> **Explanation:** Governments may prefer discretionary policies during economic crises as they provide targeted interventions tailored to address specific economic challenges.
Thank you for exploring the concept of Discretionary Policy and testing your knowledge through our comprehensive quiz. Stay curious and keep learning about the intricate world of economics!
