Which policy approach corresponds to following a fixed growth path for the money supply?

• A. Discretionary policy.
• B. Monetary rule.
• C. Fiscal rule.
• D. Expansionary policy.

Answer: (B)

A monetary rule fixes the growth rate of the money stock. Under this approach, the central bank commits to expanding the money supply by a predetermined amount each period, regardless of current conditions. This creates a predictable monetary environment and helps anchor expectations about inflation. Discretionary policy, in contrast, involves adjusting the money supply in response to the economy’s state rather than following a set path. A fiscal rule governs government spending or taxes, not the money supply. Expansionary policy describes aiming to raise aggregate demand, but without specifying a fixed money-growth path.