Question

Keynesian economics advocates the use of monetary or fiscal policy in response to a recessionary period because

		when prices are sticky, the economy’s self-adjustment mechanism will be fast
		when prices are sticky, the economy’s self-adjustment mechanism will be slow
		prices tend to be flexible and the economy adjusts quickly following a shock
		when prices are flexible, policy can help slow down adjustment

The economy is in a long-run equilibrium when aggregate demand and short-run aggregate supply give an equilibrium

		at any level of output
		above potential output
		at potential output
		below potential output

Answer 1

Answer 1) Keynesian argues that the solution to a recession is expansionary fiscal policy, such as tax cuts to stimulate consumption and investment or direct increases in government spending that would shift the aggregate demand curve to the right.

So, option a) is correct.

Answer 2) The economy is in a long-run equilibrium when aggregate demand and short-run aggregate supply give an equilibrium at the potential level of GDP. In short run it can be above or below the potential level but in long run it has to be equal to potential level.

So, option c) is correct.