Asked Feb 12, 2019

Keynesian economics defends budget balance. However, according to economists, budget balance may exacerbate the effects of the business cycle. Isn't it also a Keynesian view to use discretionary policy to smoothen the business cycles? Aren't those two views contradictory?


Expert Answer

Step 1

To understand Keynesian economics, we need to focus on two important things. One, the importance of government and two, aggregate demand. Here, the first part of the question talks about Keynesian economists defending budget balance when a majority of the economists hold a view of a balanced budget worsening the impact of business cycles. 

Step 2

To explain the budget balance, we need to understand what is a budget. A budget is a statement of all the expected receipts and expenditures of the government in an accounting year. 
Keynesian economists say that a balanced budget is important as the revenues of the government and the expenditures are equal and this may reduce the effects of business cycles as when the economy is going through a recessionary trend, the government can interfere and increase expenditure and bring the economy into action.

Step 3

A lot of economists hold the view that a balanced bu...

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