Which economic theory posits that government intervention can stabilize the economy?

Keynesian economics posits that government intervention can help stabilize the economy.

The theory developed from the work of British economist John Maynard Keynes, especially his 1936 book The General Theory of Employment, Interest and Money. Keynes argued that total spending, or aggregate demand, strongly affects output and employment, and that a market economy may remain below full employment for extended periods.

During a recession, Keynesian policy generally supports measures such as increased public spending, transfers, or tax reductions to raise demand. When inflationary pressure is excessive, governments may use tighter fiscal policy, while central banks can adjust interest rates and other monetary tools. The aim is countercyclical stabilization rather than permanent state control of every business decision.

Laissez-faire emphasizes limited government involvement, while supply-side economics focuses on incentives affecting production and investment. Monetarism gives a central role to money supply and monetary policy. Modern macroeconomics contains several blended approaches, but the quiz’s description most directly identifies Keynesian economics.