Which of the following did Keynes think was a macroeconomic problem?
A) The potential level of output and the equilibrium levels of output can be the same.
B) The equilibrium level of output can never be equal to the potential level of output.
C) Over time, the potential level of output may be pulled down to the equilibrium level of output.
D) The equilibrium level of output can fall below the potential level of output.

Question

Which of the following did Keynes think was a macroeconomic problem?  
A) The potential level of output and the equilibrium levels of output can be the same. 
B) The equilibrium level of output can never be equal to the potential level of output. 
C) Over time, the potential level of output may be pulled down to the equilibrium level of output. 
D) The equilibrium level of output can fall below the potential level of output.

Quizplus · Accepted Answer

Keynes believed that there could be a situation where the equilibrium level of output (i.e. the actual level of output in the short run) could fall below the potential level of output (i.e. the maximum output that can be produced in the long run with all available resources). This is known as a recessionary gap, and Keynes believed that government intervention was necessary to boost aggregate demand and bring the economy back to its potential level of output. Option A is incorrect because Keynes believed that the two levels of output could be the same, but only if there is full employment. Option B is incorrect because Keynes' theory of aggregate demand and the use of fiscal policy was aimed at closing the gap between the actual and potential level of output. Option C is incorrect because while demand deficiency can lead to a recessionary gap, there are other factors (such as supply-side shocks) that can also affect potential output.

Which of the Following Did Keynes Think Was a Macroeconomic