Expansionary fiscal policy to fight a recession is consistent with which schools of thought?

• A. Keynesian and Great Moderation consensus
• B. Classical
• C. Classical and Keynesian
• D. Classical and Monetarist

Answer: (A)

When a recession hits, the main idea is that boosting demand can lift output and employment. Expanding fiscal policy—through higher government spending or tax cuts—directly raises aggregate demand, helping close the gap between actual and potential output. That Keynesian line of thought treats fiscal stimulus as a tool to stabilize the economy in the short run when private spending is weak and markets aren’t automatically restoring full employment.

In the Great Moderation period, policymakers aimed for credible, stable monetary policy to keep inflation low, but that framework did not exclude using fiscal stimulus in deep downturns when necessary to support stabilization. So expansionary fiscal policy can fit with Keynesian reasoning and with the more flexible stabilization approach acknowledged during that era, as a supplementary option when monetary policy alone isn’t enough.

Other schools don’t align as closely. The classical view emphasizes rapid self-correction through flexible prices and wages, with government intervention seen as crowding out private investment and not improving long-run output. Monetarists focus on money supply and long-run neutrality, favoring rules-based monetary policy over discretionary fiscal actions due to concerns about debt and inflation.

In short, expansionary fiscal policy to combat a recession aligns with Keynesian demand-management thinking and is consistent with the stabilization mindset that prevailed, with qualification, during the Great Moderation.