A basic conclusion of Keynesian analysis is that
A)Small macro disturbances can lead to much larger macro problems.
B)The economy self-adjusts to reach full employment and a stable price level.
C)Equilibrium GDP is consistent with full employment.
D)Equilibrium GDP is consistent with price level stability.

Question

Quizplus · Accepted Answer

Keynesian analysis emphasizes that small disturbances in the economy (such as a decrease in consumer confidence) can lead to much larger macro problems, such as recession or unemployment. This is because the economy does not necessarily self-adjust to reach full employment and a stable price level, as suggested by option B. Instead, Keynesian theory suggests that government intervention may be necessary to stimulate economic activity and maintain stable levels of employment and prices. Option C is partially correct, as equilibrium GDP is consistent with full employment in the short run, but long-run equilibrium may involve some level of unemployment due to factors such as structural changes in the economy. Option D is also partially correct, as equilibrium GDP is consistent with price level stability in the short run, but inflationary pressures may arise in the long run due to factors such as a growing money supply or supply-side constraints.

A Basic Conclusion of Keynesian Analysis Is That