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Those policies were predicated on 1930s Keynesian assumptions

Those policies were predicated on 1930s Keynesian assumptions that economic recoveries always run out of steam and at certain points need artificial stimulation of demand and fi ne-tuning to keep them running at acceptable levels. The evidence of the 1970s and beyond is that whenever governments stepped in to administer stimulative medicine, they triggered runaway inflation which finally had to be stopped with strong, painful doses of recession.

a. What do Keynesians recommend for artificial stimulation of demand?

b. Describe how such stimulation could trigger runaway inflation.

c. Explain why stopping this inflation requires a recession.

d. What alternative policy might be possible?


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