According to Keynesian theory,
A) sticky prices and wages do not have an effect on aggregate expenditures.
B) because of sticky prices and wages, changes in total spending have the biggest impact on output and employment.
C) wage and price stickiness cause output and employment to remain close to their full employment levels, even when total spending changes.
D) wages and prices fall in the early stages of a recession even when total spending is declining.

Question

Quizplus · Accepted Answer

According to Keynesian theory, sticky prices and wages mean that changes in total spending have a greater impact on output and employment than changes in prices and wages. This is because firms may not be able to adjust their prices and wages immediately, so changes in total spending (i.e. aggregate demand) will have a more immediate effect on output and employment.

According to Keynesian Theory