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    Question

    In explaining persistent unemployment and output

    fluctuations in the short run, John Maynard Keynes emphasized a factor that could remain deficient even when prices and wages are flexible. Which of the following did Keynes identify as the primary determinant of short-run economic activity?
    A The long-run growth of the money supply Correct Answer Incorrect Answer
    B Aggregate demand, influenced by consumption, investment, and government spending Correct Answer Incorrect Answer
    C Aggregate supply determined by technology and factor endowments Correct Answer Incorrect Answer
    D Population growth affecting labour supply Correct Answer Incorrect Answer
    E Automatic market adjustments ensuring full employment Correct Answer Incorrect Answer

    Solution

    Keynesian economics focuses on the short-run. John Keynes argued that inadequate overall demand could lead to prolonged periods of high unemployment. An economy’s output of goods and services is the sum of four components: consumption, investment, government purchases, and net exports (the difference between what a country sells to and buys from foreign countries). Any increase in demand has to come from one of these four components. He argued that during economic downturns, a lack of investment and consumer confidence could lead to a self-perpetuating cycle of low demand and unemployment, a situation he believed required government intervention through fiscal and monetary policy to stimulate the economy and restore full employment.  ·        Money supply plays an indirect role but does not automatically stimulate activity.

    • Aggregate supply is more relevant in the long run.
    • Population growth affects long-term capacity, not short-run demand.
    • Automatic adjustment contradicts Keynesian theory.

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