100 POINTS “Because policymakers cannot be trusted to do what they say, monetary policy should be set by rules that limit the discretion of policymakers. And because monetary policy works only with a long lag, a passive policy should be preferred to an active one.” In a brief essay, discuss why a reasonable person might come to these conclusions. Why are policymakers tempted to go back on their word? How might you design rules to improve the policymakers’ performance?

A reasonable person might come to the conclusion that monetary policy should be set by rules that limit the discretion of policymakers - for the reason that policymakers cannot be trusted to do what they say - because monetary policy better combats economic slowdowns and reduces the cost of investment. The input of policymakers should be limited because of effect that monetary policy has on an important tell of how policymakers are doing - unemployment rate. When more money is pumped into the economy through monetary policies, the unemployment rate drops, so it is easy to see how tempting it is for policymakers to foucs too much on monetary policies or twist them to benefit themselves and their campaign the most.

To improve policymakers' performance, I would set limits to how money could be added to an economy at any time, or try to spread out the time over which the money is added. This would put a limit on policymakers that would potentially reduce the temptation to overdo monetary policy.

I hope this helps. I'm not sure how long you wanted it.

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