Question

Explain why Keynes believed that the government may have a management role to play in the economy.

Answer 1

Keynes believed that government can adopt expansionary or contractionary measures to take economy to its potential level of GDP. If actual GDP is more than potential GDP, there must be inflationary gap, government can adopt contractionary fiscal policy which will raise tax and reduce government spending which will reduce aggregate demand. On the other hand, if actual GDP is less than potential GDP, there must be recessionary gap, government can adopt expansionary fiscal policy through which they raise government spending and reduce tax whcih will raise aggregate demand.