Which statement is broadly agreed upon by modern macroeconomists?

• A. Discretionary fiscal policy is typically an effective remedy for a recessionary gap except in special circumstances.
• B. Monetary and fiscal policy can both be effective in decreasing unemployment in the short run but not the long run.
• C. The central bank should set a specific target rate of inflation.
• D. A monetary rule should be set by the central bank.

Answer: (B)

The main idea here is that policy can move unemployment in the short run but not permanently in the long run. When the economy is below its potential, easier money or more government spending boosts demand, lifts output, and reduces unemployment in the near term. But as wages and prices adjust over time, the economy returns to its natural level of unemployment, so those demand-driven gains don’t persist in the long run—the policy mostly changes inflation in the long run rather than unemployment.

This is why the statement about both monetary and fiscal policy being able to reduce unemployment in the short run but not in the long run is the best fit. The other points are not as universally accepted: discretionary fiscal policy is hampered by lags and political constraints, making reliable stabilization not as robust as often imagined; there is debate about whether central banks should target a specific inflation rate, with many favoring flexible or alternative targeting frameworks; and while some economists advocate monetary rules, many defend discretion to respond to changing conditions.