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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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Keynesian Perspective on the Great Depression

The Keynesian perspective on the Great Depression is that it was caused by a decrease in aggregate demand. This decrease in aggregate demand can be caused by a number of factors, such as a decrease in investment, a decrease in consumption, or a decrease in government spending.

Keynes argued that the government could play a role in stimulating aggregate demand by increasing government spending or by reducing taxes. This would help to increase the amount of money in the economy and would lead to an increase in spending and investment.

Keynesian Perspective vs. Earlier Economic Explanations

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The Keynesian perspective differed from earlier economic explanations of the Great Depression in a number of ways. First, Keynes argued that the economy could be in a state of equilibrium with high unemployment. This was a departure from the classical economic view that the economy would always tend to full employment.

Second, Keynes argued that the government could play a role in stimulating the economy. This was a departure from the classical economic view that the government should not interfere in the economy.

Wage and Price Stickiness

Wage and price stickiness refers to the fact that wages and prices do not always adjust quickly to changes in demand. This can be due to a number of factors, such as contracts, union resistance, or sticky costs.

The significance of wage and price stickiness in Keynesian analysis is that it can lead to a situation where aggregate demand is not equal to aggregate supply. This can cause unemployment and economic recession.

Keynesian economists argue that the government can play a role in reducing wage and price stickiness by providing subsidies, tax breaks, or other incentives to businesses. This can help to increase employment and economic growth.

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