thus government would “ counter ” economic cycles H u m a n i t i e s

thus government would “ counter ” economic cycles H u m a n i t i e s

This is one question please use the references as I have provided them. I have pasted the Keynesian Theory according to Dye. Use in-text citation.

Only use 6 sentences to answer the question.

Explain which perspective, Keynesian or Austerity, is better policy for government during a recession.

Keynesian Theory.

But the Great Depression of the 1930s shattered popular confidence in classical economics. During that decade, the average unemployment rate was 18 percent, rising to 25 percent in the worst year, 1933. But even in 1936, seven years after the great stock market crash in 1929, unemployment was still 18 percent of the work force, raising questions about the ability of the market to stabilize itself and ensure high employment and productivity.

According to the British economist John Maynard Keynes, economic instability was a product of fluctuations in demand. Both unemployment and lower wages reduced the demand for goods; businesses cut production and laid off more workers to adjust for lower demand for their goods, but cuts and layoffs further reduced demand and accelerated the downward spiral. Keynesian theory suggested that the economy could fall into a recession and stay there. Only government could take the necessary countercyclical steps to expand demand by spending more money itself and lowering taxes. Of course, the government cannot add to aggregate demand if it balances the budget. Rather, during a recession it must incur deficits to add to total demand, spending more than it receives in revenues. Government borrowing—and the national debt—would grow during recessions. Borrowed money would make up the difference (the deficit) between lowered revenues and higher spending. To counter inflationary trends, the government should take just the opposite steps. Thus government would “counter” economic cycles, that is, engage in “countercyclical” fiscal policies.


Dye, T.R. (2010). Understanding public policy (13th ed.). Longman: Pearson Prentice Hall. ISBN: 9780205757428. Custom ISBN: 9781256054160

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