Keynesian Model and Full Employment

Keynesian Model: Operating Below Full Employment

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Question

Within the Keynesian model, if an economy operates below full employment,

Answers

A. reducing wage rates and resource prices will quickly restore full-employment equilibrium.

B. reducing government expenditures will direct the economy back to full- employment equilibrium.

C. an increase in the real interest rate will soon restore full-employment equilibrium.

D. output will tend to remain below full-employment capacity unless aggregate expenditures increase.

E. reducing the real interest rate will soon restore full-employment equilibrium.

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Explanations

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A. B. C. D. E.

An economy operating below its full employment level can only reach its full employment capacity by increasing aggregate expenditures. This can be achieved only by inducing consumers, investors, governments and foreigners to increase their expenditures.

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