Question

Is active or passive monetary policy best for the economy. what are the advantages and disadvantages of active and passive monetary policies

Answer 1

Active fiscal policies refer to strengthening policy actions taken by the government to stabilize economy.For example , increase in expenditure for defense purposes are inevitable but it shifts the aggregate demand , expansion leads to increase in expenditure or tranfer payments but it may rise the inflation in the economy. Too much government expenditure will crowd out private spending. Such deliberate attempts it brings instant changes and fluctuations in the economy when neededd. But the passive policy is used only when the economy is already at a stable position and moving good , the government would then not bring major changes and keep it unchanged and let economy settle down on its own.Therefore , government would use active policy for example to change tax system, government will modify disposable income at hand.

An active monetary policy is the strategic use of monetary policy to control macroeconomics factors of a countries economy such as its expansion and contraction.

A passive monetary policy, on the other hand, is hen the central bank of the country decides to stabilize price levels and money supply. An active monetary policy is more aggressive in its enforcement and therefore has a larger impact whereas passive monetary policy has an impact which is much small in scale.

For example Pegging of the national currency is an example of a passive monetary policy, an active monetary policy is the cutting down of interest rate to encourage the flow of capital between banks and other entities such as firm. This was the US government's response to the 2008 recession.