According to the Keynesian view, if policy makers thought the economy was about to enter an inflationary boom, there should be a tax increase.
- Keynesian economists advocate deficit spending on labor-intensive infrastructure projects to increase employment and stabilise wages in times of economic weakness. The government would raise taxes when there was substantial demand-side growth in order to control the economy and prevent inflation. Keynes suggested that the government should decrease expenditure while raising taxes during a period of rising inflation.
- Keynes is frequently seen as an economist who accepted and promoted modest inflation as an unfavorable side effect of long-term, carefully controlled economic growth. According to Keynesians, the best way to get out of a recession is to implement expansionary fiscal policy. Examples include cutting taxes to encourage spending and investing or directly increasing government spending, both of which would cause the aggregate demand curve to move to the right.
Thus the correct answer is tax increase.
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