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Policy activism vs policy rules

1. One of the major issues in macroeconomics is disagreement in the debate over policy activism versus policy rules. What exactly is that disagreement? Any implications?

2. The Japanese economy has been in and out of a recession for the past 22 years. Since 1989 the value of their main stock market index N 225 has declined by 75% from 46K to about 9K. The technical definition of a recession is when the GDP of a nation contracts for two consecutive quarters. The Bank of Japan (central bank) can't lower rates any further as the discount rate has been at virtually 0% (liquidity trap?). Some people believe that something similar could happen in the US after the increase in government debt due to the huge financial bail outs on top of mounting tremendous budget deficitsâ?¦

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1. This disagreement stems from differing views on government intervention in the economy. Policy activism requires that the monetary and fiscal policy be used in such a way as to improve the economy. This type of reasoning dates back to Keynes, who believed that the economy sometimes needs government help to avoid stagnation. Policy rules require instead that the government use such things as a constant-growth-rate policy so as to accommodate economic growth, ...

Solution Summary

The debate over policy activism and policy rules; similarity between US and Japanese economies