Keynesian Economic Theory

The theory, developed by John Maynard Keynes during the Great Depression, that the government should take an active role in managing the level of aggregate demand in an economy. During recessions, government should run budget deficits (lower taxes and increase government spending) to stimulate AD and move the economy back towards full employment. During inflationary periods, the government should raise taxes and reduce government spending to bring AD back to its full employment level.

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