Effectiveness of Monetary Policy and Fiscal Policy Active policy The Fed and the government use different tools to steer the economy. Recall that monetary policy, the toolbox of the Fed, includes performing open market operations, and changing both the reserve requirement and the federal funds interest rate. Recall also that fiscal policy, the toolbox of the government, includes changing both taxes and government spending. 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
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