Which of the following is consistent with the Keynesian theory?
A)Irrational waves of pessimism would cause a decrease in aggregate demand and increase unemployment.
B)Irrational waves of optimism would cause a reduction in aggregate demand and decrease unemployment.
C)Changes in business and consumer expectations generally stabilize the economy.
D)Changes in consumer confidence are irrelevant for the economy.

Question

Quizplus · Accepted Answer

According to the Keynesian theory, fluctuations in consumer and business confidence can cause changes in aggregate demand and result in cyclical unemployment. Therefore, irrational waves of pessimism that lead to a decrease in aggregate demand are consistent with this theory. Options B, C, and D are inconsistent with the Keynesian theory as they suggest that changes in consumer/business confidence would lead to different outcomes than those predicted by the theory.

Which of the Following Is Consistent with the Keynesian Theory