Suppose the economy is initially operating at its potential GDP. In the Keynesian view, which two of the following will occur after the economy is hit by an adverse aggregate demand shock?
A) Output and employment will increase, as will inflationary pressures
B) The economy will take a long time to revert to its former state
C) Both output and employment will fall
D) The economy will not be affected and will remain at its potential GDP

Question

Quizplus · Accepted Answer

In the Keynesian view, an adverse aggregate demand shock leads to a decrease in output and employment (C) as businesses respond to decreased demand for their products by reducing production and laying off workers. Additionally, the Keynesian perspective suggests that without intervention, the economy will take a long time to revert to its former state (B), as it relies on mechanisms like price and wage adjustments which can be slow to respond.

Suppose the Economy Is Initially Operating at Its Potential GDP