The Keynesian view of economics assumes that:
wages and prices adjusts in short time.
wages and prices are sticky.
the economy must focus is on long-term growth.
economic output is primarily determined by aggregate supply.
The correct answer and explanation is :
The correct answer is: wages and prices are sticky.
Explanation:
The Keynesian view of economics is primarily concerned with short-term economic fluctuations and the role of government intervention in managing economic output. One of the core concepts of Keynesian economics is that wages and prices are “sticky,” meaning they do not adjust quickly to changes in supply and demand. This is in contrast to classical economic theories, which assume that wages and prices are flexible and adjust quickly to bring the economy to full employment.
In a Keynesian framework, prices and wages do not adjust immediately, and this rigidity can lead to periods of unemployment and underproduction. This happens because businesses and workers are often reluctant to reduce wages or prices due to psychological, contractual, and institutional factors. For example, workers may resist wage cuts, even in times of economic downturns, and businesses may be hesitant to lower prices for fear of reducing demand for their products. As a result, in the short run, the economy may fail to reach its full potential output, and there may be involuntary unemployment.
Keynesian economists argue that government intervention is necessary to stimulate demand in times of economic downturns. This can be done through fiscal policies like increased government spending or tax cuts, which can help boost aggregate demand. This is in stark contrast to classical economics, which emphasizes long-term growth driven by supply-side factors such as capital accumulation, technological progress, and market efficiency.
Therefore, in the Keynesian model, the economy is often seen as being stuck in an equilibrium where demand is insufficient to bring about full employment, and wages and prices fail to adjust quickly enough to resolve the problem. This sticky-price and sticky-wage assumption leads to the argument that economic policy, particularly fiscal stimulus, can be used to manage economic activity and help achieve stable growth and low unemployment.