Which policy tool is most associated with Keynesian stabilization of unemployment during recessions?

• A. Decrease government spending
• B. Increase government spending
• C. Balanced budget
• D. Increase taxes

Answer: (B)

When the economy slips into a recession, demand for goods and services falls, and unemployment tends to rise. Keynesian thinking says the way to counter this is by expansionary fiscal policy that boosts aggregate demand. Increasing government spending directly adds to total demand, raising output and work opportunities, and the spending multiplier amplifies this effect as people earn income and spend more. In contrast, reducing government spending or raising taxes would pull demand down further, worsening unemployment. A balanced budget doesn’t provide the extra boost needed in a downturn. So, increasing government spending is the policy tool most closely tied to Keynesian stabilization of unemployment during recessions.