Question

In our macro example using the PPC model, according to the Keynesian school of thought, the economy is typically:

A) Always at full employment
B) Often at full employment
C) Frequently in a recession
D) Often in a state of inflation

Answer 1

In the Keynesian perspective, the economy can often be below full employment, leading to recessions and high unemployment, challenging the idea that supply always creates equal demand. Option C is correct.

Step-by-step explanation:

According to the Keynesian school of thought, the economy is often not at full employment and can experience periods of recession and high unemployment. The Keynesians challenge classical economics, which assumes that supply always creates enough demand to avoid recession.

They suggest that the economy can indeed suffer from an overall lack of demand, leading to involuntary unemployment and the need for government intervention to stabilize the economy. This is because not all business failures are matched by successes, leading to a net decrease in economic activity during recessions.