A school of thought that maintains that monetary policy should be the main tool of stabilization policy and recognizes constraints on policy imposed by the natural rate of unemployment and the political business cycle is

• A. Keynesian macroeconomics.
• B. the Great Moderation consensus.
• C. monetarism.
• D. classical macroeconomics.

Answer: (B)

Focusing stabilization policy on monetary policy while recognizing limits from the natural rate of unemployment and from political incentives is characteristic of the Great Moderation consensus. This view holds that central banks should use monetary policy as the primary tool to keep inflation and output stable, but it also accepts that unemployment has a natural floor and that policymakers may face pressures related to elections or political cycles. In other words, policy aims for credible, predictable monetary actions that avoid trying to permanently drive unemployment below its natural rate or engage in opportunistic timing around political considerations.

Keynesian macroeconomics would emphasize fiscal policy as the main stabilization tool rather than monetary policy. Monetarism centers on money growth rules, but its emphasis is more on long-run money supply paths than on acknowledging political-cycle constraints in the same way. Classical macroeconomics tends to view stabilization policies as less effective at influencing real outcomes and does not prioritize monetary policy as the sole or primary stabilization tool.