Topics: Monetary policy, Federal Reserve System, Inflation Pages: 3 (880 words) Published: September 20, 2014

Active Versus Passive?

Principles of Macroeconomics

Active policy associates a high cost with the failure to pursue a discretionary policy despite the lags involved, advocates of active policy prefer action whether through fiscal policy, monetary policy, or some combination of the two inaction. This Chapter distinguished between the two general approaches: The active approach and the passive approach, the active approach views the economy as relatively unstable and unable, economic fluctuations arise primarily from the private sector, particularly investment, and natural market forces may not help much or may be too slow once the economy gets off track. Passive policy advocates believe that uncertain lags and ignorance about how the economy works prevent the government from accurately determining or effectively implementing the appropriate active policy Therefore, the passive approach, rather than pursuing a misguided activist policy, relies more on the economy’s natural ability to correct itself and on the government’s automatic stabilizers. But there are some advantages to active policy. Active policy allows policymakers to respond to shifts in a complex economy and steer the economy in the optimal direction, be able to keep the economy growing steadily without inflation if they are given complete control of macroeconomic policy. Similarly, active policy, at least in theory, gives control to those individuals who are considered optimally capable to deal with the fluctuations in the economy. That is, active policy allows the sharpest policymakers of the time to control the economy. This problem is based on the fact that it takes time for economic problems to be noticed and dealt with. Detection lags refer to the amount of time between the onset of an economic problem and its detection. Policy lags, on the other hand, refer to the amount of time between the enactment of macroeconomic policy and the moment when that...
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