Question

Question 31 pts

According to Keynes, the most important factor causing the business cycle is the level of wages.

True

False

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Question 41 pts

It is _____ that in the Keynesian model, prices and wages are “sticky”; it is _____ that according to the Keynesian economists, full employment is the norm.

true; true

false; false

false; true

true; false

Answer 1

1) False: According to Keynes, the most important factor causing the business cycles is the aggregate demand in the economy. According to him, the aggregate demand helps in determining the various economic factors like level of income, employment and output. During boom, AD is high leading to higher prices and higher output. On the other hand, during a recession, AD is low leading to lower prices and lower output.

2) It is true that in the Keynesian model, prices and wages are sticky; it is false that according to the Keynesian economists, full employment is the norm. According to the classical economists, full employment is the norm while keynesian economists saw the possibility of saw the possibility of persistent aggregate-demand failure leading to a rise in unemployment rates.