Which concept describes the idea that in the short run, economic output is influenced by aggregate demand and supports government intervention during recessions?

Which concept describes the idea that in the short run, economic output is influenced by aggregate demand and supports government intervention during recessions?

• A. Mercantilism
• B. Classical Economics
• C. Monetarism
• D. Keynesian Economics

Answer: (D)

In the short run, output moves with aggregate demand, and government intervention can stabilize a downturn. Keynesian economics argues that prices and wages don’t adjust quickly enough to restore full employment on their own, so active policy is needed to lift demand when the economy is in recession. By increasing spending or cutting taxes, the government boosts aggregate demand, shifts the demand curve to the right, and raises real GDP and employment. The idea of the multiplier helps show how an initial bit of spending can lead to a larger overall boost in economic activity. This approach, tied to John Maynard Keynes during the Great Depression, contrasts with the view that markets automatically clear quickly (classical economics), or with approaches that focus mainly on money supply (monetarism) or on trade balances (mercantilism).

In the short run, output moves with aggregate demand, and government intervention can stabilize a downturn. Keynesian economics argues that prices and wages don’t adjust quickly enough to restore full employment on their own, so active policy is needed to lift demand when the economy is in recession. By increasing spending or cutting taxes, the government boosts aggregate demand, shifts the demand curve to the right, and raises real GDP and employment. The idea of the multiplier helps show how an initial bit of spending can lead to a larger overall boost in economic activity. This approach, tied to John Maynard Keynes during the Great Depression, contrasts with the view that markets automatically clear quickly (classical economics), or with approaches that focus mainly on money supply (monetarism) or on trade balances (mercantilism).