If prices and wages were fully flexible, then the economy behaves in the way that Keynes predicted.

Question

Quizplus · Accepted Answer

Keynes predicted that in the short run, prices and wages are not fully flexible and therefore the economy can experience periods of unemployment and recessions due to insufficient aggregate demand. It is only in the long run, when prices and wages have adjusted, that the economy returns to full employment. This is in contrast to the classical view, which assumes that prices and wages are fully flexible and that the economy always operates at full employment in the long run.

If Prices and Wages Were Fully Flexible, Then the Economy