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Keynesian Solutions

1. What is the Keynesian solution to a recession or depression? How does the Keynesian multiplier work?
2. We are slowly coming out of a recession now. What kind of policies were/are proposed to help get us out of this recession? Do these sound like Keynesian polices or Classical ones? Why?

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The Keynesian solution to a recession or depression is that the government should use the monetary and fiscal policy to correct disequilibrium and improve the efficiency of the economy. The government should stimulate the demand because in the short run the aggregate supply curve is upward sloping and so an increase in aggregate demand will lead to an increase in production.

Keynesian multiplier works in this manner. When the government purchases increase by $1, because Y = C + I + C + NX this will increase the income by $1. This is the direct effect. When the income increases ...

Solution Summary

The response provides you a structured explanation of fiscal policy during economic depression . It also gives you the relevant references.