An active approach when conducting economic policy has the benefit of minimizing negative impacts to the economy such as reduction in GDP or an increase in unemployment. In contrast, a passive approach allows the economy to stabilize in the event an irrational exuberance has occurred. In addition, this approach reduces the chances of overheating an economy.
The cost of an active approach is usually high, for instance if unemployment is going up, a country has to spend a large sum to provide jobs by creating jobs related to infrastructure. However, a passive approach may not cost very much initially but later on it may become very costly to take corrective actions if the economy is going downhill.
Dec 3rd, 2014
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