There are two general approaches to macroeconomic policymaking. We'll call them the passive approach and the active approach. Naturally, there are various shades of gray between these two extremes, but let's assume for a moment that we're faced with a choice between following one of these two approaches. To do so, we need to generalize the foundational beliefs of each approach.
Topic
|
Passive | Active |
---|---|---|
Economy: | Stable | Unstable |
Investment: |
Sensitive to Dr (less to business conditions) |
Sensitive to business conditions (less to Dr) |
Self-correcting mechanism: | works fairly quickly | works fairly slowly |
Prices/wages: | very flexible |
not too flexible (rigid downwards) |
Unemployment: |
voluntary (any involuntary is brief) |
voluntary + involuntary |
SR AS (& PC): |
vertical (or nearly vertical) |
positive slope (mostly horizontal) |
LR AS (& PC): | vertical | probably vertical |
Policy prescription: | rules (prefer monetary) | discretion (prefer fiscal) |
Our list above leads to a variety of questions,
including the following:
[Note: remember that Dr means
"change in interest rates"]