To combat a recession, Keynesian fiscal policy recommends:
A) An increase in taxes.
B) An increase in government spending.
C) An increase in taxes and a decrease in government purchases to balance the budget.
D) A reduction in both taxes and government spending.

Question

Quizplus · Accepted Answer

Keynesian fiscal policy recommends an increase in government spending as this can help to boost aggregate demand and stimulate economic growth during a recession. This can be financed through deficit spending, meaning that the government would spend more than it collects in revenue, which can be paid back later when the economy is stronger. Increasing taxes (choice A) or decreasing government purchases (choice C) could actually exacerbate a recession by reducing aggregate demand. A reduction in both taxes and government spending (choice D) is known as austerity and is a controversial approach that some economists argue can worsen a recession by reducing demand and causing a decline in economic activity.

To Combat a Recession, Keynesian Fiscal Policy Recommends