Question

Keynes believed that Question 6 options: a.Say's law would hold in a laissez-faire economy. b.the economy would always be near or on its production possibilities frontier. c.wages and prices are often inflexible in the downward direction. d.the equilibrium level of output will always be at the full-employment level of output.

Answer 1

Answer:

C) wages and prices are often inflexible in the downward direction.

Explanation:

Even economists that believe in neoclassicism understand now that wages and prices are sticky. This means that even though economists used to believe that people would willingly accept a pay cut, they were completely wrong. Not a single person in the whole world is willing to accept cut without putting a fight for it. There are CEOs that say that their salary is only $1 per year, but their bonuses are $50 million.

Just imagine if your boss one day decides that since he wants to earn a higher profit, he will just lower your salary. Now you can relate your own personal experience with the experience of 150 million Americans, or 800 million Chinese, Japanese, Mexicans, etc., it's the same everywhere.

Something similar happens to prices, but with a little less drama. Many companies cannot simply decide one day to lower their price because their costs aren't lowered just because they them to. Net income is the equivalent of a company's salary, and even companies will not accept a pay cut.