Question

Explain the difference between “active” discretionary fiscal policy advocated by mainstream economists and “passive” fiscal policy advocated by new classical economists.

A. Advocates of “active” discretionary fiscal policy argue that the economy is automatically self-correcting when disturbed from its full-employment level of real output.

B .are opposed to the use of discretionary fiscal policy, whereas advocates of “passive” fiscal policy are in favor of deficit spending during recessions.

C argue that if the economy does not return to full employment within a year, some action should be taken.

D are in favor of deficit spending during recessions, whereas advocates of “passive” fiscal policy are opposed to the use of discretionary fiscal policy.

Consider the following statement: “The problem with a balanced-budget amendment is that it would, in a sense, require active fiscal policy—but in the wrong direction—as the economy slides into recession.”

A This statement recognizes that requiring an annually balanced budget would require less government spending during a recession and more during an expansion, intensifying the swings of the business cycle.

B be difficult to do since the economy may not be at full employment.

C be an impossible pursuit given the political divisiveness.

D require more government spending during a recession and less during an expansion

a b c or d

Answer 1

1.  Advocates of “active” discretionary fiscal policy are in favor of deficit spending during recessions, whereas advocates of “passive” fiscal policy are opposed to the use of discretionary fiscal policy. Hence, option(D) is correct.

2. This statement recognizes that requiring an annually balanced budget would  require less government spending during a recession and more during an expansion, intensifying the swings of the business cycle. Hence, option(A) is correct.