Why is persistent unemployment a possibility in the Keynesian model but NOT in the classical model?
A) The Keynesian model assumes that people work for motives other than those of earning an income for themselves and supporting a family.
B) The Keynesian model assumes that nominal wages are inflexible downward.
C) The Keynesian model assumes that the level of real GDP is inflexible.
D) The Keynesian model assumes that workers can lose their jobs to foreign competition during economic downturns.

Question

Quizplus · Accepted Answer

In the Keynesian model, nominal wages are assumed to be inflexible downward, which means that workers may not voluntarily reduce their wages in response to a surplus of labor. As a result, wages may remain high, causing persistent unemployment even as the economy is operating below its potential level of output. In contrast, the classical model assumes that wages and prices are flexible, which means that market forces will eventually eliminate any unemployment that arises due to a mismatch between labor supply and demand.

Why Is Persistent Unemployment a Possibility in the Keynesian Model