Question

The macroeconomic theory holding that business cycles are caused by changes in aggregate demand and that such cycles can and should be influenced by fiscal and monetary policy undertaken to promote economic stability is the ______ Theory

Answer 1

Keynesian Theory

Step-by-step explanation:

The Keynesian economic theory focuses on aggregate demand. Economic growth is achieved by fostering aggregate demand through fiscal (increasing government spending) and monetary (expansionary) policies.

The economy has two sides, aggregate demand and aggregate supply. If suppliers believe that consumers will demand larger quantities, they will produce more. But if suppliers do not believe that they will be able to sell the goods and services they produce, they will reduce supply and halt investment.

Therefore, if aggregate demand is strong, producers will increase output because they know they can sell more, and that promotes economic growth without necessarily increasing inflation. Keynesian economics considers both suppliers and consumers expectations and how they affect economic growth.