Which method of macroeconomic policy is better? Active policy relies on the judgment and character of policymakers to pursue the optimal long-term policies for the economy. Passive policy takes the power of choice away from policymakers and instead relies on the judgment and character of the writers of the rules. It is not clear that either method of policy is better. The majority of macroeconomic policy in the United States is active. Whichever method of policy is desired, a major problem exists. This problem is based on the fact that it takes time for economic problems to be noticed and dealt with. Detection lags refer to the amount of time between the onset of an economic problem and its detection. Policy lags, on the other hand, refer to the amount of time between the enactment of macroeconomic policy and the moment when that policy takes effect.
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.