Question

Which of the following propositions best sums up the core of ‘Keynesian’ economics?

a. Supply creates its own demand.
b. Governments should always run budget deficits.
c. An increase in government spending is likely to cause inflation.
d. In the short-run, output depends on the level of aggregate demand.

Answer 1

The core of Keynesian economics is best summed up by the proposition that in the short run, output is dependent on the level of aggregate demand. So, the correct option is d. In the short run, output depends on the level of aggregate demand.

Step-by-step explanation:

The student's question revolves around understanding the core principle of Keynesian economics. To provide a clear and concise response, we should consider the foundational ideas of this economic theory. Keynesian economics primarily posits that in the short run, fluctuations in the economy, including recessions and cyclical unemployment, are due to shifts in aggregate demand.

Furthermore, Keynesian theory acknowledges that prices and wages can be 'sticky', meaning they don't adjust quickly to changes in supply and demand, which can lead to unemployment. Therefore, in response to the student's question, the proposition that best sums up Keynesian economics is: This idea is supported by the belief that when private demand is insufficient to maintain full employment, government intervention through expansionary fiscal policy is necessary to increase aggregate demand and spur economic activity.