Patinkin and Modigliani argue that Keynes' argument that demand could fall below production would hold only if:
A) inputs are fully flexible.
B) prices are fully flexible while wages are not.
C) prices and wages are fully flexible.
D) prices and wages are not fully flexible.

Question

Quizplus · Accepted Answer

Patinkin and Modigliani argue that Keynes' argument would hold only if prices and wages are not fully flexible. If prices and wages were fully flexible, then any decrease in demand would lead to a decrease in prices and wages, which would eventually increase demand and bring the economy back to equilibrium. However, if prices and wages are not fully flexible, then a decrease in demand could lead to unemployment and a decrease in production, which would create a persistent recessionary gap.

Patinkin and Modigliani Argue That Keynes' Argument That Demand Could