Question

From a Keynesian point of view, which is more likely to cause a recession: aggregate demand or aggregate supply, and why?

Short answer

Aggregate demand is more likely to cause a recession as the Keynesian perspective focuses mainly on aggregate demand concepts. When demand is low in the economy, the government can raise spending and/or lower taxes through fiscal policy to boost demand.

Step-by-step solution

The Keynesian Perspective

A Keynesian believes that aggregate demand is impacted by a variety of public and private economic actions, and that it occasionally behaves irrationally. The most important public decisions are those concerning monetary and fiscal policies.

Cause of Recession

The Keynesian stresses on the aggregate demand. A change in aggregate demand would generate economic swings in the short run. In the short run, if aggregate demand falls, the economy's expenditure will fall. It will function as a deterrent to investment and economic activity. As a result, when demand is low in the economy, the government must raise spending while lowering taxes through fiscal policy. Government initiatives can be used to address insufficient demand.