Which statement do economists broadly consider to be true?

• A. Discretionary monetary and fiscal policy cannot affect the long-run rate of unemployment.
• B. Discretionary fiscal policy is typically more effective than monetary policy in fighting recessions.
• C. A nation's central bank should be managed by elected officials.
• D. A monetary rule can increase real GDP.

Answer: (A)

The idea being tested is how policy affects unemployment over the long run. In the long run, unemployment tends to the natural rate, determined by the structure of the labor market. Discretionary monetary and fiscal policy can boost demand and lower unemployment temporarily, but as people adjust expectations and wages catch up, unemployment returns to its natural rate. So these policies cannot permanently change the long-run level of unemployment.

The other statements run into standard issues. Fiscal policy is not typically more reliable or faster than monetary policy in fighting recessions because of implementation lags and crowding-out effects. Central banks are commonly kept independent from elected officials to avoid political influence that could destabilize inflation and expectations. A monetary rule can influence inflation and short-run output, but it cannot sustainably raise real GDP above its long-run potential level.