Keynes believed that wages and prices were sticky. Therefore, a rightward shift of the aggregate demand curve would cause a(n):
A) decrease in the level of income.
B) increase in the unemployment level.
C) change in the long-run aggregate supply curve.
D) increase in employment, production, and income.

Question

Quizplus · Accepted Answer

According to Keynes, wages and prices are sticky in the short run, so an increase in aggregate demand would mainly result in an increase in employment, output, and income. The decrease in unemployment is also a result of increased economic activity. Option A is incorrect because an increase in aggregate demand would lead to an increase rather than a decrease in the level of income. Option B is incorrect because an increase in aggregate demand would reduce unemployment, not increase it. Option C is incorrect because changes in aggregate demand do not lead to changes in the long-run aggregate supply curve in the Keynesian model.

Keynes Believed That Wages and Prices Were Sticky