IntheprevioussectionwelearnedthattheFedandthegovernmentusemonetarypolicyandfiscalpolicytosteertheeconomy.Buttheefficacyofmonetarypolicyandfiscalpolicyisheavilydebated.Bothsupportersanddissentersraisemanyquestionsastotheexactworkingdetailsofmonetarypolicyandfiscalpolicy.
Onemajorareaofdebateiswhethermonetarypolicyandfiscalpolicyshouldberunbyactivecontrolorwhethertheyshouldbedealtwithmorepassively.OnesidebelievesthattheFedandthegovernmentcannotreacttoeconomicchangeswithenoughspeedtojustifyactivepolicyandthatinsteadpassivepolicyismoreproductiveandsafer.Theothersidebelievesthatfastactionthroughactivepolicyisthesurestandsafestwaytokeeptheeconomyontrack.
Anothermajorareaofdebateintherealmofmacroeconomicsdealswiththebudgetdeficit.Therearenumerousquestionsthatsurroundthebudgetdeficitdebate.Forinstance,shouldthebudgetbebalanced?Whatistheburdenofthenationaldebt?Whatarethelong-termeffectsofanunbalancedbudget?Theanswerstothesequestionsdivideeconomists.
ThisSparkNotecoverstwomajoreconomicpolicythatrelatedirectlytomoneyandtotheeconomy.Thesedebatesareimportantsincetheyoftendivideeconomists.Similarly,byunderstandingthesedebates,itispossibletoviewthecomplexityofmacroeconomicpolicyintherealworld.Whilemacroeconomictheoryseemsratherblackandwhite,theapplicationofthistheorytotherealworldisnowherenearthissimple.
TheFedandthegovernmentusedifferenttoolstosteertheeconomy.Recallthatmonetarypolicy,thetoolboxoftheFed,includesperformingopenmarketoperations,andchangingboththereserverequirementandthefederalfundsinterestrate.Recallalsothatfiscalpolicy,thetoolboxofthegovernment,includeschangingbothtaxesandgovernmentspending.
Allofthesetoolscanbecontrolledactively.Thatis,iftheFedorthegovernmentdecidetouseexpansionarypolicy,theycansimplyselectatoolfromthepolicytoolboxanduseit.Inthisway,activepolicyisdefinedasactionsbytheFedorbythegovernmentthataredoneinresponsetoeconomicconditions.Thatis,theFedorthegovernmentchoosetorespondtosomethingintheeconomybyundertakingaspecificpolicy.Thisisalsocalleddiscretionarypolicy.
Activepolicy,whilesimple,isopentoanumberofdifficulties.BecauseitreliesontheactionsandexperiencesofthepolicymakersintheFedandinthegovernment,theweaknessesorprejudicesofthesepolicymakerscanbetranslatedintoofficialeconomicpolicy.Forinstance,duringelectionyears,acentralbankermaypursuepolicythatenablestheeconomytogrowintheshortrun,regardlessofthelong-termeffects,inordertohelpacandidate.Ontheotherhand,thecentralbankermaycontracttheeconomytohurtacandidate.Similarly,itwouldbepossibleforthepolicymakerstopursuepoliciesthatachievetheirselfishendsratherthanthosethatarebestfortheeconomyatlarge.Finally,withactivepolicy,policymakerscansayonethinganddoanother.Theremaybebenefitstomakingthepublicbelievethatsomethingdifferentisoccurringintheeconomyratherthanwhatactuallyisoccurring.Forinstance,iftheFedwantstoincreaseinvestment,itcouldusedeceptionbyclaimingthatitraisedinterestrateswhilenotactuallydoingso.Inthisscenario,privateinvestorswouldsavemorebutinvestmentwouldremainattheoldlevelorevenincrease.Thus,itisreasonabletoclaimthatactivepolicyleavesmonetarypolicyandfiscalpolicyopentonotonlyaccidentalhumanerrorbutalsotomaliciousandself-servingacts.
Buttherearesomeadvantagestoactivepolicy.Activepolicyallowspolicymakerstorespondtoshiftsinacomplexeconomyandsteertheeconomyintheoptimaldirection.Forinstance,anexcellentpolicymakermaybeabletokeeptheeconomygrowingsteadilywithoutinflationifsheisgivencompletecontrolofmacroeconomicpolicy.Similarly,activepolicy,atleastintheory,givescontroltothoseindividualswhoareconsideredoptimallycapabletodealwiththefluctuationsintheeconomy.Thatis,activepolicyallowsthesharpestpolicymakersofthetimetocontroltheeconomy.Finally,theabilitytocreatedifferentexpectationsbetweenthepolicymakersandthepubliccanbeanadvantageouspolicytool,asdescribedinthepreviousparagraph.
Passivepolicy
Incontrasttoactive(ordiscretionary)policyispassivepolicy(orpolicybyrule).Underthissystem,macroeconomicpolicyisconductedaccordingtoapresetseriesofrules.Theserulestakeintoaccountmanymacroeconomicvariablesanddictatethebestcourseofactiongiventheseconditions.Forinstance,apassivepolicymayfollowtherulethatinordertostabilizetheeconomytheinterestratemustbedroppedonepointwheneverthenominalGDPfallsonepercent.