When an economy is operating below its potential capacity, Keynesian economists argue that
A) taxes should be raised if the government is currently running a budget deficit.
B) taxes should be lowered but only if the government is running a budget surplus.
C) the government should cut taxes and/or increase expenditures in order to stimulate aggregate demand.
D) both a and b are correct.
E) all of the above are correct.

Question

Quizplus · Accepted Answer

Keynesian economists argue that in order to stimulate aggregate demand and bring the economy to its potential capacity, the government should cut taxes and/or increase expenditures. This is because increased government spending will lead to an increase in overall demand for goods and services, which will in turn lead to increased production and employment. Additionally, tax cuts can put more money in the hands of consumers and businesses, which can lead to increased spending and investment. Raising taxes, as in choice A, could actually hurt economic growth by reducing disposable income and overall demand. Lowering taxes only if the government is running a budget surplus, as in choice B, could limit the ability of the government to take action to stimulate the economy when needed. Therefore, choice C is the best option.

When an Economy Is Operating Below Its Potential Capacity, Keynesian