Beatrice is a Keynesian economic theorist. Accordingly, which of the following actions would Beatrice consider to be most expansionary?

A. a $10 billion decrease in taxes

B. a $10 billion increase in government spending

C. a $10 billion increase in both government spending and taxes

D. a $10 billion increase in government spending and a $5 billion decrease in taxes

D. a $10 billion increase in government spending and a $5 billion decrease in taxes

Explanation:

Keynesian economy is a macroeconomic theory based on the views of the 20th century British economist John Maynard Keynes. The Keynes economy advocates a mixed economy in which the private sector is dominant but the state and public sector play a big role. According to the Keynesian economy, decisions made by the private sector sometimes cause inefficient macroeconomic results. For this reason, the state should play an active role and stabilize the business cycle. For example, monetary policies through the central bank and fiscal policies through the government should be implemented.

According to Keynesian theory, the sum of some micro-economic behaviors exhibited by all individuals and businesses results in inefficiency and the economy operates at a level below its potential output and growth. When the total demand for products is insufficient, the economy goes into a crisis and unnecessary unemployment occurs due to the defensive behavior of the manufacturers. In such cases, the government may follow some policies to increase aggregate demand and consequently speed up economic activities and reduce unemployment. Most Keynesian people propose policies to stabilize the business cycle. For example, when the unemployment level rises too high, the state may follow a growth-oriented monetary policy.

Keynes considered the revival of the economy with low interest rates or taxes and increase in state investments or government spending as a solution to the Great Depression. It increases investment income and consequently consumption by the state, as a result of which more production and investment are provided, and as a result, consumption increases again. The first economic stimulus investment triggers a sequence of events and provides a much more stringent economic efficiency than the subsequent investment. Some Keynesian economists have particularly emphasized the importance Keynes gives to international coordination, the necessity of international economic institutions, and how economic forces can lead to war or peace.