Question

Compare the advantages and limitations of active fiscal policy with passive fiscal policy.

Answer 1

Active fiscal policy is implemented when the economy is relatively unstable . Whereas passive fiscal policies is approached when the economy is relatively stable . During recessions there is economic turmoil and wastage of resources . We know that successful implementation of fiscal policy can protect an economy from such recessionary shocks . So in this case not using an active fiscal policy to stabilize the economy would be inefficient and wasteful .

A passive approach on the other hand would be to keep the government intervention at a normal and minimal level and let supply fall in log run due to unemployment and the economy to adjust . The active policy can stabilize the economy quicker and can increase employment . But the limiations are that it might lead to rise of price level or inflationary pressures in the long run .