Which of the following best describes the Keynesian view of the interrelationshi

Question

Which of the following best describes the Keynesian view of the interrelationships among spending, real output, and the general level of prices?

a)Prices decrease until full employment is reached; at this point, any additional spending is inflationary.

b) Spending and prices are directly related until full employment is reached; once full employment is reached, increases in spending lead only to a higher real output.

c) Spending and real output are directly related until full employment is reached; once full employment is reached, increases in spending lead only to a higher price level.

d) Spending and real output are directly related, but spending and prices are inversely related.

a)Prices decrease until full employment is reached; at this point, any additional spending is inflationary.

b) Spending and prices are directly related until full employment is reached; once full employment is reached, increases in spending lead only to a higher real output.

c) Spending and real output are directly related until full employment is reached; once full employment is reached, increases in spending lead only to a higher price level.

d) Spending and real output are directly related, but spending and prices are inversely related.

Explanation / Answer

Keynesian economics stated that the economy does not necessarily its equilibrium on its own, and government intervention is required to correct the economy’s imperfections.

According to this theory, equilibrium occurs only when aggregate demand equals aggregate supply and consumption is derived from income.

Correct option: (c) Spending and real output are directly related until full employment is reached; once full employment is reached, increases in spending lead only to a higher price level.

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