. During the great recession of 2008 in the US, the study indicates that the dem

Question

. During the great recession of 2008 in the US, the study indicates that the demand for unskilled and semi-unskilled workers to hire has declined, but the wage structure paid to the workers hired at all levels did not change significantly during the same period. According Keynesian Macroeconomic theory, this phenomenon is called

a. Self-correcting mechanism of free market systems

b. Long term contract between employers and employees for wages to be relatively sticky during this great recession.

c. Flexible adjustment of wages and prices by suppliers (employees) and employers

d. Classical theory of laissez-faire (leave the market alone)

Explanation / Answer

c. Flexible adjustment of wages and prices by suppliers (employees) and employers

Prior to Keynesian economics, classical economic thinking held that cyclical swings in employment and economic output would be modest and self-adjusting. According to this classical theory, if aggregate demand in the economy fell, the resulting weakness in production and jobs would precipitate a decline in prices and wages. A lower level of inflation and wages would induce employers to make capital investments and employ more people, stimulating employment and restoring economic growth.

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