The economy is in a recessionary gap,wages are inflexible downward,and investment spending is insensitive to changes in the interest rate.In this situation,a Keynesian is likely to advocate the use of __________ policy.

Question

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When the economy is in a recessionary gap (i.e., when the output gap is negative), the use of expansionary fiscal policy is appropriate according to Keynesian economics. This policy includes government spending increases, tax cuts, or a combination of both, designed to increase aggregate demand and stimulate economic growth. Since wages are inflexible downward, this approach can help prevent a deflationary spiral. Furthermore, because investment spending is insensitive to changes in the interest rate, monetary policy (whether expansionary or contractionary) may not be as effective in this situation.

The Economy Is in a Recessionary Gap,wages Are Inflexible Downward,and