A Keynesian model that is consistent with fully flexible wages and prices is based upon the notion of
A) cooperation failures.
B) coordination failures.
C) collaboration failures.
D) decreasing returns to scale.

Question

Quizplus · Accepted Answer

A Keynesian model with fully flexible wages and prices suggests that markets can always clear and achieve equilibrium, but coordination failures can lead to persistent unemployment and suboptimal outcomes. In other words, if workers and firms cannot coordinate their expectations and decisions, they may not find mutually beneficial employment opportunities, and this can create a self-reinforcing cycle of low demand, low output, and low employment. Therefore, government policies that can coordinate expectations, stabilize demand, and provide public goods can potentially improve the welfare of society.

A Keynesian Model That Is Consistent with Fully Flexible Wages