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How did the Keynesian perspective address the issue of the Great Depression of the late 1920s and early 1930s? How did it differ from earlier economic explanations?

What does “wage and price stickiness” mean? What is its significance in Keynesian analysis?

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The Keynesian perspective on the Great Depression argued that it was caused by a lack of aggregate demand. This means that there was not enough money in the economy to support the level of economic activity that was needed. This lack of aggregate demand was caused by a number of factors, including the stock market crash of 1929, the bank failures of the early 1930s, and the Smoot-Hawley Tariff Act of 1930.

Keynesian economists argued that the government could play a role in addressing the Great Depression by increasing aggregate demand. This could be done through fiscal policy, such as tax cuts or spending increases, or through monetary policy, such as lowering interest rates.

Full Answer Section

Keynesian economics differed from earlier economic explanations of the Great Depression in a number of ways. First, Keynesian economists argued that the economy could be in equilibrium at less than full employment. This meant that it was possible for there to be high unemployment and low output even if the economy was not in a recession.

Second, Keynesian economists argued that the government could play a role in stimulating the economy. This was a departure from the laissez-faire economic policies that were dominant at the time.

Third, Keynesian economists argued that wages and prices were sticky, meaning that they did not adjust quickly to changes in demand. This meant that changes in aggregate demand could have a magnified impact on output and employment.

Wage and price stickiness is the idea that wages and prices do not always adjust to changes in supply and demand. This can lead to problems in the economy, such as unemployment and inflation.

In Keynesian analysis, wage and price stickiness is significant because it can prevent the economy from self-correcting. If wages and prices do not adjust to changes in demand, then the economy can get stuck in a recession. This is because businesses will not hire workers if they do not think they can sell the goods that they produce.

Keynesian economists argue that the government can play a role in addressing wage and price stickiness by providing subsidies to businesses and workers. This can help to keep wages and prices up, which can stimulate the economy.

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