Question

Keynes believed that 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; wages and prices do not fall in the labor and product markets because unions dislike wage cuts and companies are a monopoly market. 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; wages and prices do not fall in the labor and product markets because unions dislike wage cuts and companies are a monopoly market

Explanation:

Say's Law is classical economists point of view, stating that supply creates its own equilibrium. Keynes theory was strictly against this Says Law. Keynes also stated that equilibrium & output is not always at full employment level, it might be below it. Implicatively, the economy would be on or inside it's full production potential PPC.

Keynes stated that wages & prices are sticky. They don't adjust to fluctuating economic activity too quickly. The wage & price stickiness, rigidity is more in downwards direction, they don't fall immediately in response to recession. The reason behind the variables stickiness is that, businesses don't know whether economic slowdown is temporary or permanent. Wages are sticky because of labour unions, employment contracts & prices are sticky because of menu costs, for fulfilling high wages expenditure.