Which one of the following statements is true?
A) The classical model cannot explain periods of prolonged unemployment.
B) The Keynesian model cannot explain periods of prolonged unemployment.
C) The Keynesian model assumes complete flexibility of wages and prices.
D) The Keynesian model shows that the level of real GDP is supply-determined.

Question

Quizplus · Accepted Answer

The classical model assumes that markets will adjust quickly to any shocks, including changes in labor supply or demand. However, empirical evidence shows that periods of prolonged unemployment can occur, which the classical model cannot explain. The Keynesian model, on the other hand, can explain such periods through the notion of sticky wages and prices. Option B is incorrect because the Keynesian model was actually developed to explain periods of prolonged unemployment. Option C is incorrect because the Keynesian model assumes that wages and prices are sticky, not flexible. Option D is incorrect because the Keynesian model shows that the level of real GDP is demand-determined, not supply-determined.

Which One of the Following Statements Is True