According to Keynesian theory:
A) the long-run and short-run aggregate supply curves are identical.
B) a decrease in aggregate demand leads to decreases in output and prices in the short run.
C) a decrease in aggregate demand will decrease prices but not output in the short run.
D) the short run is relatively unimportant.

Question

Quizplus · Accepted Answer

According to Keynesian theory, a decrease in aggregate demand leads to decreases in output and prices in the short run. Therefore, option B is the correct choice. Option A is incorrect because according to Keynesian theory, the long-run and short-run aggregate supply curves are not identical. Option C is incorrect because a decrease in aggregate demand will lead to a decrease in output, along with a decrease in prices, in the short run. Option D is incorrect because the short run is considered crucial in Keynesian theory, as it is the period during which the economy may experience fluctuations in output and employment levels.

According to Keynesian Theory