If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to
A) counteract the recession.
B) prolong the recession and increase its severity.
C) end the recession sooner.
D) increase the level of real GDP.

Question

Quizplus · Accepted Answer

According to Keynesian theory, during a recession, government spending should increase, and taxes should decrease to stimulate demand and promote economic growth. By raising taxes during a recession, the government is reducing disposable income and decreasing consumption, which can lead to a further decline in business activity and higher unemployment rates. Therefore, raising taxes during a recession can actually prolong the recession and increase its severity.

If the Economy Is in a Recession, and the Government