According to traditional Keynesian analysis,if the economy is in a recession,the government can move it back towards full employment by
A)cutting taxes and increasing expenditures.The effect of the tax cut is larger.
B)cutting taxes and increasing expenditures.The effect of the tax cut is smaller.
C)raising taxes and decreasing expenditures.The effect of the tax increase is larger.
D)raising taxes and decreasing expenditures.The effect of the tax increase is smaller.

Question

Quizplus · Accepted Answer

According to traditional Keynesian analysis, during a recession, the government can use expansionary fiscal policy by cutting taxes and increasing government spending. These measures will increase aggregate demand and shift the economy towards full employment. However, the effect of tax cuts will be smaller than the effect of government spending because households might save some of the extra disposable income from the tax cut, while government spending goes directly into the economy. Therefore, the best choice is B, which states that the government should cut taxes and increase expenditures, but the effect of the tax cut is smaller.

According to Traditional Keynesian Analysis,if the Economy Is in a Recession,the