Question

Is active or fiscal policy is best for the economy currently. What are the advantages and disadvantages of active and passive fiscal policies.

Answer 1

US economy has almost recovered from recession. Growth rate is above 2 percent and unemployment rate has reduced to 4.1 %. Now government needs to adopt active fiscal policy by reducing government spending and doing away with tax concessions.

Under the active fiscal policy, government takes deliberate actions to deal with boom and bust situations.

Advantages of Active fiscal policy:

• It is highly beneficial during the period of recession or boom.
• Once implemented, it has short time lag which produce immediate impacts on economy.
• It flexible which can be molded according to exigencies.

Disadvantages:

• It is influenced by the political decisions.
• Its decision making is long process.

Advantages of Passive Fiscal policy:

• It does not get influenced easily by political meddlings.
• It is carried out based on old rules and norms, hence there is less ambiguities.

Disadvantages:

• It does not respond adequately to recession or boom.
• Sometime such policies cause only inflation.
• it is not flexible.