This module fully discusses Fiscal Policy, the intentional use of the spending and taxing powers of the government in order to achieve macroeconomic stability. Much of the economic rationale behind using Fiscal Policy to actively manage Aggregate Demand comes from the theories of John Maynard Keynes. This interventionist approach is sometimes viewed as a contrast to the more Classical view that relies on the free market to restore itself to a full employment equilibrium, when given enough time, over the long run. Keynes believed that private sector spending, especially investment, was unstable, thus requiring occasional active counter-cyclical fiscal policies. In other words, if investment spending and other components of Aggregate Demand suddenly dropped, the fiscal policy would counter this recessionary phase of the business cycle with higher government spending, lower taxes, or both. It is not so much that Keynes thought prices would never adjust to restore the economy to full employment but that he objected to the amount of time it would take and the amount of human suffering that could be alleviated if full employment was restored more quickly. Keynes is famously quoted as saying that in the long run, "we are all dead".

Discuss some episodes of the last century when the U.S. economy seriously contracted, especially the Great Recession of 2007-2009 and the Great Depression. What was the response of Fiscal Policy? What was the response of Monetary Policy? Remember that Monetary policy is managed by the Fed, or the central bank of the United States, and Fiscal policy is managed by Congress, which votes on new taxes and government programs. Do you think specifically that the Fiscal Policy response was appropriate? Why or why not? What was the effect on the U.S. national debt? Do you think there can come a time when further interest rate cuts become ineffective, and Fiscal Policy must be considered? On balance, do you think Fiscal Policy is an effective approach to macroeconomic stabilization? How are automatic stabilizers different from an active, discretionary Fiscal Policy? What do you think the best policy response might be to a recession? What influenced your answer?