Which policy suggests Keynesian economic theory?
Multiple Choice
short-term increases in government spending to stimulate the economy
proposing long-term solutions in order to create wider swings in the business cycle
creating a national banking system that owns and operates most of the global and regional banks
reducing government involvement in the free-market economy
The Correct Answer and Explanation is :
The correct answer is:
Short-term increases in government spending to stimulate the economy.
Explanation:
Keynesian economic theory, named after the British economist John Maynard Keynes, suggests that economic recessions can be mitigated through active government intervention. Keynes argued that during times of economic downturns, consumer demand typically falls, leading to lower economic activity and rising unemployment. In such circumstances, Keynesian economics advocates for increased government spending to stimulate demand and boost economic activity. The idea is that when private sector spending is insufficient, the government can step in to increase aggregate demand, which in turn leads to higher production, job creation, and overall economic recovery.
Keynes believed that in the short term, government spending could make a significant difference. This approach is particularly effective when the economy is in a slump and monetary policies (like lowering interest rates) are not sufficient to spur growth. The theory also supports government investments in public works, infrastructure projects, and other sectors that can create jobs and stimulate demand.
Keynesian economics has had a substantial influence on fiscal policy, especially in times of economic crises like the Great Depression and the 2008 global financial crisis, when governments used stimulus packages to help boost economic recovery.
The other options in the multiple-choice question do not align with Keynesian thought:
- Proposing long-term solutions to create wider swings in the business cycle: This aligns more with theories like supply-side economics, not Keynesianism.
- Creating a national banking system that owns and operates most of the global and regional banks: This is not a central tenet of Keynesianism.
- Reducing government involvement in the free-market economy: This is more consistent with classical economic theory or laissez-faire capitalism, which advocates minimal government intervention.
Thus, short-term increases in government spending to stimulate the economy is the correct policy suggestion based on Keynesian economics.
I’ll also generate an image to complement this explanation.
Here is an image illustrating the concept of an economic stimulus package, where government spending is used to stimulate the economy through large infrastructure projects. It shows how government intervention can boost demand and create jobs.