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| Q. |
Acording to Keynesian theory of income determination, at full employment, a fall in aggregate demand causes - |
| A. | a fall in prices of output and resources |
| B. | a fall in real gross National product and employment |
| C. | a rise in real gross National product and investment |
| D. | a rise in prices of output and resources |
| Answer» A. a fall in prices of output and resources | |
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Explanation: In 1936, John Maynard Keynes published the book "The General Theory of Employment, Interest and Money to explain the prolonged and massive unemployment in the Great Depression. The book criticises the classical model. Keynes turns Say's Law on its head, arguing that aggregate demand determines national output and employment in the economy. In this sense, demand creates its own supply. Unlike the Classical economists, Keynes believes that prices and wages are rigid, especially in the downward direction and hence the economy is not a self-correcting mechanism. In other words, Keynes believes that as prices and wages are rigid, the economy can stay at a below-full-employment equilibrium. Suppose that the economy is at the full-employment equilibrium. |
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