The policy response to the recession of 2008-2009 provided an experiment on the potency of Keynesian fiscal policy. In what respect was this true?
A) The money supply increased rapidly and the short-term interest rates were pushed to near zero just as the Keynesian model of fiscal policy recommends.
B) Government spending increased sharply and the budget deficits were large just as the Keynesian model of fiscal policy recommends.
C) The money supply increased rapidly and the budget was shifted toward a surplus just as the Keynesian model recommends.
D) The federal budget was balanced just as the Keynesian model indicates would be prudent policy during a recession.

Question

Quizplus · Accepted Answer

The policy response to the recession of 2008-2009 involved a sharp increase in government spending and large budget deficits, which aligns with the recommendations of Keynesian fiscal policy. This was an experimental test of the potency of Keynesian fiscal policy because it provided an opportunity to analyze whether the injection of government spending would lead to an increase in aggregate demand, and thus stimulate economic growth, as predicted by Keynesian theory.

The Policy Response to the Recession of 2008-2009 Provided an Experiment