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Unformatted text preview: All of these tools can be controlled actively. That is, if the Fed or the government decide to use expansionary policy, they can simply select a tool from the policy toolbox and use it. In this way, active policy is defined as actions by the Fed or by the government that are done in response to economic conditions. That is, the Fed or the government choose to respond to something in the economy by undertaking a specific policy. This is also called discretionary policy. Active policy, while simple, is open to a number of difficulties. Because it relies on the actions and experiences of the policymakers in the Fed and in the government, the weaknesses or prejudices of these policymakers can be translated into official economic policy. For instance, during election years, a central banker may pursue policy that enables the economy to grow in the short run, regardless of the long-term effects, in...
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- Fall '10