What theory suggests that fiscal stimulus can lower unemployment?

Keynesian economics is the theory that suggests fiscal stimulus can lower unemployment. This approach, developed by economist John Maynard Keynes during the Great Depression, posits that during periods of economic downturn, aggregate demand is insufficient to maintain full employment.

Keynes argued that increased government spending and lower taxes can stimulate demand, leading to higher levels of consumption and investment. In times of recession, when businesses and consumers are reluctant to spend, government intervention can help boost economic activity. By injecting money into the economy through fiscal measures, the government can create jobs, reduce unemployment, and help pull the economy out of a slump. This theory emphasizes the role of total spending in the economy and how it affects output and inflation.

In contrast, other economic theories such as monetarism focus primarily on the control of the money supply and often emphasize the role of interest rates rather than direct fiscal intervention. Supply-side economics stresses tax cuts and deregulation as a means to stimulate economic growth, while classical economics assumes that markets function best without government intervention and that unemployment will self-correct over time through flexible wages and prices. Therefore, fiscal stimulus in the Keynesian context supports the argument for government action to address unemployment.