Final answer:
According to Keynesian theory, fiscal policymakers can counteract recessions using expansionary fiscal policy, such as tax cuts and increased government spending, to increase aggregate demand and move the economy towards full employment. Contractionary policies are used when the economy is overheating to prevent inflation.
Step-by-step explanation:
According to Keynesian theory, fiscal policymakers can combat the impact of recessions by implementing expansionary fiscal policy. This involves tax cuts to incentivize consumption and investment or direct increases in government spending to shift the aggregate demand curve to the right, thus stimulating economic activity and combatting unemployment. When the economy is in a recession and the aggregate demand is low, an increase in government spending or a decrease in taxes can help move the economy towards potential GDP and full employment. Conversely, when the economy is above potential GDP and inflation is a concern, Keynesian theory recommends contractionary fiscal policy, which includes tax increases or government spending cuts to shift aggregate demand to the left and cool down the economy.
Furthermore, these fiscal measures are part of a broader macroeconomic strategy to stabilize the economy, intervening at times when private sector demand is insufficient to maintain full employment. This approach to manipulation of aggregate demand is a cornerstone of Keynesian economics, which advocates for active government intervention to manage economic cycles and smooth out fluctuations in economic activity.