Question

What is the Keynesian prescription for recession? For inflation?

Short answer

The Keynesian prescription for recession includes increasing government spending, decreasing taxes, and implementing expansionary monetary policy to stimulate the economy. In contrast, the prescription for inflation involves decreasing government spending, increasing taxes, and employing contractionary monetary policy to control rising prices and excessive demand.

Step-by-step solution

Definition of Keynesian Prescription

The Keynesian prescription refers to the economic policies advocated by British economist John Maynard Keynes. His economic theories prescribe that government intervention is necessary to regulate the economy in times of recession or inflation. These prescriptions are derived from the core principles of Keynesian economics, which argue for the use of fiscal and monetary policies to stabilize the business cycle.

Keynesian Prescription for Recession

A recession is a significant decline in economic activity, resulting in higher unemployment rates and reduced output. During a recession, the Keynesian prescription suggests that the government should implement the following measures: 1. Increase government spending: The government should invest in infrastructure projects, education, and healthcare sectors to create jobs and stimulate the economy. This increased spending is called "fiscal stimulus." 2. Decrease taxes: Lowering taxes on businesses and individuals will encourage increased spending and investment, boosting the economy. 3. Implement expansionary monetary policy: The central bank should lower interest rates and increase the money supply, making borrowing more accessible and promoting economic activity.

Keynesian Prescription for Inflation

Inflation refers to the sustained increase in the general price level of goods and services in an economy over time. When inflation gets too high, Keynesian prescription suggests the following measures to control it: 1. Decrease government spending: The government should cut its spending on various projects to reduce the circulation of money in the economy. 2. Increase taxes: Raising taxes on businesses and individuals will decrease spending and cool off an overheating economy. 3. Implement contractionary monetary policy: The central bank should raise interest rates and decrease the money supply, making borrowing more expensive and thereby reducing spending and demand in the economy. In conclusion, the Keynesian prescription for recession involves increasing government spending, decreasing taxes, and implementing expansionary monetary policy. On the other hand, for inflation, the prescription calls for a decrease in government spending, an increase in taxes, and the adoption of contractionary monetary policy.