Question

What are the arguments in favor of active policies? What are the arguments in favor of passive policies?

Answer 1

Arguments in favor of active policies:-

Recessions cause economic hardship for millions
of people.
 The Employment Act of 1946:
“It is the continuing policy and responsibility of the
Federal Government to…promote full employment
and production.”
 The model of aggregate demand and supply
shows how fiscal and monetary
policy can respond to shocks and stabilize the economy.

Arguments in favor of passive policies :-

Under this system, macroeconomic policy is conducted according to a preset series of rules. These rules take into account many macroeconomic variables and dictate the best course of action given these conditions. For instance, a passive policy may follow the rule that in order to stabilize the economy the interest rate must be dropped one point whenever the nominal GDP falls one percent.

The major advantage to passive policy is that it takes the short-term desires of policymakers out of the list of possible goals of macroeconomic policy. Instead, the policymakers are simply present to carry out the macroeconomic policy and to ensure that everything runs smoothly. Policy by rule uses policymakers to implement, rather than design, macroeconomic policy. Similarly, another advantage of passive policy is that the policy rules are based on optimizing the economy in the long run and are less likely to trade short run prosperity for long run growth.