Fiscal policy, Macroeconomics, Business cycle

Keynes, on the other hand, argued for a more reactive response from the government because without it unemployment will only extend. To battle this, government intervention is necessary because fiscal policies can stimulate the economy. The state cannot wait for the self-correction of prices and wages. Developed during the Great Depression, this theory assumes that prolonged unemployment will only hurt the economy. The solution to a swift revitalization to overcome a recession is by implementing government spending from taxes. This multiplies aggregate demand to get closer to a leveled real Gross Domestic Product. To prevent staggering inflation, the government only needs to increase taxes or decrease spending (Cliffnotes n.p.).