Which statement best captures John Maynard Keynes's view on how governments should respond to downturns?

• A. Governments should borrow and invest to create employment and demand
• B. Governments should repay debt immediately
• C. Governments should run balanced budgets regardless of situation
• D. Governments should never borrow

Answer: (A)

Keynes argued for countercyclical fiscal policy: when the economy stalls, government should step in with spending and investment financed by borrowing. The goal is to boost aggregate demand enough to lift production and employment. Spending can have a multiplier effect, meaning each dollar of government outlay can generate more than one dollar of economic activity, helping close the gap left by weak private demand. Deficits are not inherently bad in a recession; they can be appropriate to stimulate the economy and can be managed later once growth returns.

Choosing to repay debt immediately or to run balanced budgets in downturns would withdraw needed stimulus and deepen the slump, while never borrowing misses the primary tool Keynes saw for stabilizing the economy. Therefore, borrowing and investing to create employment and demand best captures Keynes’s view.