Feedback-Rule Policy

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DEFINITION of 'Feedback-Rule Policy'

An economic policy that is triggered when a certain economic situation results in economic instability, as a result of gross domestic product (GDP) being either above or below full employment equilibrium or the price level not clearing the aggregate market. Feedback-rules are representations of what the government, in terms of monetary or fiscal policy, should do in order to help the economy get back to equilibrium.

INVESTOPEDIA EXPLAINS 'Feedback-Rule Policy'

The type of policies that the government can implement is to change the aggregate supply of money, change the level of taxes, or to change the aggregate level of consumption by changing government expenditure.

One example of a feedback-rule policy could involve changes in net exports. If the net exports of a country have fallen, then a feedback-rule policy could be that as net exports fall, the government will lower the level of government expenditure to help increase net exports.

Because net exports are equal to exports less imports, a decrease in government expenditure will reduce imports. When imports fall, net exports will rise.

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