Question

Outline the benefits and costs of sticking to a set of rules in each of the following cases. How do each of these situations relate to the conduct of economic policies?

a. Going on a diet

b. Raising children

Short answer

a. Dieting is similar to monetary policy in that when we look at rules-based monetary policy and how it is implemented, we tend to see that it is successful in the long run if we keep to it, but it lacks some flexibility.

b. It has to do with discretionary monetary policy, because it enables for those subjective judgement considerations to be included while formulating policy.

Step-by-step solution

Content Introduction

A central bank's future activities are governed by a set of rigid standards known as rules-based monetary policy.

Explanation (Part a)

If people keep to that particular set of dieting restrictions, they will experience the long-term benefits that they desire, and so it will be successful. Now, some of the costs when it comes to following to a set of rules and dieting will be unsuccessful, because no one will stick to the rules because they would miss out on items they would like.

Explanation (part b)

Raising children provides some assurance. However, one of the costs of adhering to a set of rules is that each child is unique, which suggests that perhaps you shouldn't be adhering to a set of rules in the first place. Perhaps you should adjust the way you raise these children based on that specific individual.