Question

Suppose the economy is at a position below its institutional production possibilities frontier. To improve this situation, Keynesian economists might propose that government __________ taxes, which will cause the aggregate demand curve to shift to the __________ and Real GDP will __________.

Answer 1

Answer:

Keynesian economists might propose that government reduces taxes, which will cause the aggregate demand curve to shift to the right and Real GDP will increases.

Explanation:

Keynesian economics is demand-sided.

If the economy is producing at full capacity, increased demand will only cause inflation as goods and services cannot be increased although people are willing to pay more (real GDP the same)

However, if the economy is below capacity, the problem is that there is not enough demand to drive production (additional goods and services produced will not be bought). Keynesians would advocate reducing taxes to stimulate demand.

When taxes are reduced, goods become cheaper. People are willing to buy more at similar prices (that producers charge), causing the aggregate demand curve to shift to the right. As economy is below capacity, suppliers are able to responded by supplying more goods and services (supplier curve shift to the right) and Real output (GDP) would increase.