ScholarMatic: Explanation & Answer
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We said that a key part of the classical approach was the assumption that prices were flexible.
Conversely, one of the crucial ideas of the Keynesian view is that prices/wages are “sticky”.
This means that the sort of adjustment we covered in DQ 9 will not be timely.
So, what does Keynes argue for as the response to this problem? For example, say we have a lagging economy (which means unemployment), and prices/wages are sticky (so things won’t just quickly adjust on their own, and there is going to be long-term suffering), what is Keynes’ prescription for how to get the short-run equilibrium point back up to the ideal place?
In other words, how do we get the intersection of SRAS and AD back up to the level of LRAS under the Keynesian theory? This theory does NOT assume that the economy will self-adjust because it sees wages as “sticky” (resistant to change in the short run).
ScholarMatic: Explanation & Answer
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