Question

According to the Keynesian framework, which of the following will not help a country to get out of a recession, but may help that country reduce inflation?

1) an increase in military spending
2) a decrease in military spending
3) increase in spending by the government on health care
4) decrease in federal government taxation of personal income

Answer 1

A decrease in military spending can help reduce inflation according to the Keynesian framework, as it decreases aggregate demand without primarily targeting recessionary issues.

Step-by-step explanation:

According to the Keynesian framework, a decrease in military spending may not help a country get out of a recession but could help reduce inflation.

Using an AD/AS diagram, we can see that a surge in military spending would increase aggregate demand (AD), which helps pull an economy out of a recession.

However, if real GDP is already to the right of potential GDP, increasing aggregate demand further can be inflationary, as it would push the economy beyond its productive capacity.

Therefore, a decrease in military spending, which lowers AD, can help control inflation without exacerbating a recession, as long as it is done in a calculated manner to avoid reducing AD too much.