Keynesian analysis indicates that an unexpected decline in aggregate demand will lead to
A) a reduction in inventories and an expansion in employment.
B) an increase in inventories and a reduction in output.
C) lower interest rates, which will stimulate aggregate demand and keep the economy at full employment.
D) a lower price level, which will quickly guide the economy to full-employment equilibrium.

Question

Quizplus · Accepted Answer

According to Keynesian analysis, a decline in aggregate demand will lead to a decrease in output and an increase in inventories. This is because firms will produce less in response to lower demand, but will still have unsold goods on hand. To reduce inventories, they will cut back on production even further, leading to a reduction in employment.

Keynesian Analysis Indicates That an Unexpected Decline in Aggregate Demand