The Keynesian view of economics assumes that
a) the economy must focus is on long-term growth.
b) economic output is primarily determined by aggregate supply.
c) the Keynesian Phillips curve is vertical.
d) wages are sticky.
The correct answer and explanation is :
The correct answer is d) wages are sticky.
Explanation:
The Keynesian view of economics, developed by John Maynard Keynes during the Great Depression, emphasizes the role of government intervention in managing economic demand. One of the key concepts in Keynesian economics is that wages and prices are “sticky,” meaning they do not adjust quickly or easily to changes in economic conditions. This stickiness in wages is a crucial part of the Keynesian model because it implies that labor markets do not automatically clear (i.e., supply and demand for labor do not always balance at an equilibrium wage).
In Keynesian economics, when there is a decline in demand for goods and services, businesses may cut back on production, which leads to layoffs and higher unemployment. However, because wages are sticky (i.e., employers are reluctant to reduce wages or workers are resistant to wage cuts), this can prevent the labor market from adjusting quickly to changes in demand. The result is unemployment, rather than a natural adjustment in wages that would bring supply and demand into balance. The idea is that the economy can experience prolonged periods of unemployment and underutilized resources because wages do not fall immediately to restore full employment.
Keynes argued that in such circumstances, it is the responsibility of the government to step in and stimulate aggregate demand, for example, through public spending or monetary policy, to help boost economic activity and reduce unemployment. This is in contrast to classical economics, which assumed that markets, including labor markets, were self-adjusting, and that the economy would naturally return to full employment without government intervention.
Thus, the concept of “sticky wages” underpins much of Keynesian theory, as it explains why economies might not automatically return to full employment and why government intervention is necessary to manage economic downturns.