Fiscal Policy
Keynes recommended that when aggregate demand slumped causing a recession or depression in output and a loss of jobs, the government should step in to increase spending.
(a) Following the collapse of systemically important banks in 2008, were the G-20 group of countries right in early 2009 to coordinate their fiscal policies and increase government spending? How would you distinguish the effect of such a policy on (i) confidence (ii) cut back in investment spending by companies (iii) averting a global meltdown or severe economic depression such as the 1930’?
(b) If you were in 2015 for one day the Minister of Finance in Italy, facing deflation, falling output, rising unemployment and a growing national debt relative to income what kind of fiscal policies would you pursue? Would you increase or cut government expenditures or raise taxes? Would you recommend structural reform in the labour market to complement your policies? Would you suggest, as all three of the leaders of the opposition parties do, that Italy leave the Euro?