Question

Which of the following actions would a Keynesian economist recommend pursuing in the case of a...

Which of the following actions would a Keynesian economist recommend pursuing in the case of a shock to wealth?

A. Increase the money supply to increase aggregate demand while keeping fiscal policy stable.

B. Nothing.

C. Keep the money supply steady but run deficits for expansionary fiscal policy to increase AD.

D. Increase the money supply and pursue expansionary fiscal policy to increase aggregate demand.

I think it's D but it could be C I suppose though one doesn't have to be running at a deficit so yah D right?

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Answer #1

Keynesians believed that the money supply will not have any effect in the short run because the money supply curve is flat i.e. in the liquidity trap. At this point no matter how much more money is released into the market the consumer will absorb it and the interest rates will remain at the very low level. So, when the Keynesian comes leave the Monetary policy alone.

The answer is "C", a government deficit will increase the income and output in the economy. it will increase the AD in the economy.  

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