The Keynesian policy when the economy is operating below the potential level.

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What is the philosophical, economic essence of Keynesian doctrine or “Keynesianism” that emerged from the experience and attempted explanations of the Great Depression ? What would all Keynesians believe, in order to be “Keynesian?”

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Question

Chapter 16.A, Problem 6SQ

To determine

The Keynesian policy when the economy is operating below the potential level.

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What is the philosophical, economic essence of Keynesian doctrine or “Keynesianism” that emerged from the experience and attempted explanations of the Great Depression ? What would all Keynesians believe, in order to be “Keynesian?”

The Keynesian economic framework is based on an assumption that: A) an increase in government spending will cause the aggregate demand curve to shift to the left. B) people can afford a high level of government services. C) prices and wages are sticky and do not adjust rapidly. D) an increase in government spending will cause the aggregate demand curve to shift to the left.

Select the answer that best describes Keynesian and Classical economic theories. Classical theory is useful for describing the long-run movement between economic equilibria while Keynesian theory is helpful to describe short-run movements in the price level. Classical theory suggests that the economy will quickly move between equilibria, eliminating the need for government intervention. Keynesian theory suggests that fiscal and/or monetary policy can be useful in counteracting changes in equilibria resulting from sticky prices and sticky wages. Keynesian theory suggests that tax cuts or direct government expenditure are ways to stimulate the economy while Classical theory suggests that only tax cuts provide useful stimulus. Classical and Keynesian theories both advocate for direct government intervention during recessions.