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A-Level Economics · AD shift left (recession) diagram question
On the Keynesian view, what would REVERSE this recession?
The diagram
The answer
Expansionary fiscal policy — the government raises spending and cuts taxes to shift AD back right, accepting a budget deficit. Stimulate AD: more G, lower taxes, AD2 back toward AD1. Keynesians accept the deficit as the price of fixing the recession. If you have a demand-side problem you need a demand-side solution — you can't fix it with more supply. During COVID, building pubs would have been a bad strategy: the shortage was demand, not capacity. Keynesians therefore stimulate AD with active fiscal policy and accept budget deficits as necessary to restore long-run equilibrium.
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