Question

The Great Recession was the most serious economic downturn in U.S. history since the Great Depression. The recession began in December 2007. Interest rates at the time were very low, close to zero. Despite the American Recovery and Reinvestment Act of 2009, a nearly $800 billion fiscal stimulus and an expansionary monetary policy, the economy is only now getting back to normal in 2015. In retrospect, what set of macro policies, if anything, should we have conducted to achieve a better recovery? Explain your reasoning. Be sure to address the arguments favoring active versus passive policymaking as they relate to your discussion.

Answer 1

Active is discretionary policy making . This includes all actions by monetary or fiscal policymakers , that are undertaken during an economic crisis . Here the  $800 billion fiscal stimulus and an expansionary monetary policy , are all part of active policy making .

Now the American Recovery and Reinvestment Act of 2009 worked like a stimulus . It was a response to promote economic recovery and growth . It included measures to modernize infrastructure, enhance energy independence, expand educational opportunities, preserve and improve affordable health care, provide tax relief, and protect those in greatest need during an economic crisis .

Now Passive or nondiscretionary policymaking , is the policy that is conducted based on a rule . Such as progressive tax rates which are fixed by some rule . So when during a recession income falls , tax burden falls automatically because people now fall in lower income slabs . Passive policy works like automatic stabilizers .

So such passive macro policies should have been conducted for better recovery . Passive monetary policy targets price stability and stable interest rates . On the other hand passive fiscal policy targets employment and real GDP . This ensures quicker recovery since it does not require a government mandate and hence there is no implementation lag like active policies .