Which of the following is an important insight of Keynesian analysis?
A) When an economy is in a recession, lower interest rates and lower wage rates will quickly direct the economy back to full employment.
B) When widespread unemployment is present, increases in aggregate demand will exert a larger impact on real output than when the economy is operating at or near full employment.
C) When an economy is in a recession, it makes sense to increase taxes and reduce government expenditures.
D) A balanced budget is the key to maintenance of full employment.

Question

Quizplus · Accepted Answer

The important insight of Keynesian analysis is that when there is widespread unemployment, increases in aggregate demand (through government spending, for example) will have a larger impact on real output than when the economy is operating at or near full employment. This is known as the Keynesian multiplier effect. Lowering interest rates and wage rates may also be helpful in directing the economy back to full employment, but this is not the main insight of Keynesian analysis. Option C and D are not in line with Keynesian analysis.

Which of the Following Is an Important Insight of Keynesian