Keynes argued that prices and wages were likely to be inflexible during a recession because:
A) unemployment would be high and firms would have little spare capacity.
B) unemployment would be low and firms would have little spare capacity.
C) unemployment would be high and firms would have substantial spare capacity.
D) unemployment would be low and firms would have substantial spare capacity.

Question

Quizplus · Accepted Answer

Keynes argued that during a recession, high unemployment would lead to a decrease in aggregate demand, which in turn would decrease production and cause firms to have substantial spare capacity. However, because prices and wages are inflexible in the short run, firms would be unable or unwilling to immediately lower prices and wages to match the decrease in demand.

Keynes Argued That Prices and Wages Were Likely to Be