In the 1960s, government policy makers believed that they could _____
A) stabilize the economy by letting the market system solve all problems.
B) reduce unemployment by running federal budget surpluses.
C) eliminate the government's role in stabilization policy.
D) use changes in the money supply to virtually eliminate business cycles.
E) use taxation and government spending to fine-tune the economy.

Question

Quizplus · Accepted Answer

In the 1960s, government policy makers believed in using taxation and government spending to fine-tune the economy. This was known as Keynesian economics and was based on the idea that government intervention could stabilize the economy during periods of recession or inflation. The government would increase spending during recessions to stimulate demand and create jobs, while decreasing spending during periods of inflation to prevent the economy from overheating. This policy was used to some success in the 1960s, but eventually ran into problems in the 1970s due to the emergence of stagflation – a combination of high inflation and high unemployment – which seemed to defy traditional Keynesian solutions.

In the 1960s, Government Policy Makers Believed That They Could