Distinguish between discretionary monetary policy and monetary “rules.” How do the mainstream economists and monetarists differ on their recommendations for the use of rules or discretionary policy?

What will be an ideal response?

Discretionary monetary policy is the use of an expansionary monetary policy to combat a recession and a contraction policy to combat an inflationary period. In other words, it is an activist monetary policy for stabilizing the economy. Mainstream economists would argue for discretionary monetary policy to complement fiscal stabilization policy. Monetarists argue for monetary “rules” designed to be implemented without regard to the state of the economy. Supposedly they will have a neutral effect on the cyclical ups and downs of the economy. A suggested monetary rule is to keep the money supply expanding at about 3 to 5 percent per year which is about the same as the potential growth rate of real GDP. The point for a monetary rule is to avoid mistakes and to provide enough liquidity to allow the economy to expand at its potential rate.