During the 1960s recession, which policy did Kennedy advocate to stimulate the economy under Keynesian theory?

• A. He raised tariffs
• B. He cut taxes
• C. He increased military spending
• D. He cut government welfare programs

Answer: (B)

Expansionary fiscal policy is the idea at work here: when the economy is in a downturn, boosting demand through policy helps lift output and employment. Cutting taxes increases households’ after-tax income, which tends to raise consumer spending and, by improving after-tax profits, can spur business investment as well. This creates a multiplier effect that moves the economy toward higher production and lower unemployment, which is exactly the Keynesian aim Kennedy pursued with tax relief. Raising tariffs wouldn’t directly strengthen domestic demand and can hinder growth through higher costs and slower trade. While increasing military spending does provide a form of fiscal stimulus, Kennedy’s well-known, targeted move to stimulate the economy under Keynesian theory was cutting taxes to boost overall demand. Cutting welfare programs would reduce transfer payments and dampen consumption, not stimulate it.