-Assume that the economy depicted in Panel (b)of Exhibit 20A-1 is in short-run equilibrium where AD₁ equals SRAS₁.Keynesian theory argues:
A) nominal wages will fall as long as employment remains above the natural level of unemployment.
B) lower wages will result in a shift from SRAS₁ to SRAS₂.
C) long-run equilibrium will be established at Yp and P₁.
D) government intervention must shift AD₁ rightward to AD₂.

Question

-Assume that the economy depicted in Panel (b)of Exhibit 20A-1 is in short-run equilibrium where AD₁ equals SRAS₁.Keynesian theory argues:
A) nominal wages will fall as long as employment remains above the natural level of unemployment. 
B) lower wages will result in a shift from SRAS₁ to SRAS₂. 
C) long-run equilibrium will be established at Yp and P₁. 
D) government intervention must shift AD₁ rightward to AD₂.

Quizplus · Accepted Answer

Keynesian theory suggests that in the short run, the economy may not automatically return to full employment (Yp) due to rigidities like sticky wages. Therefore, government intervention is often necessary to shift aggregate demand (AD) rightward to achieve long-run equilibrium.

-Assume That the Economy Depicted in Panel (B)of Exhibit 20A-1