Which one of the following statements is true?
A) The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the classical model.
B) The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the Keynesian model.
C) The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the idea that increases in aggregate demand will increase the price level but will leave real GDP unchanged.
D) The actual behavior of prices and real GDP during the decade of the 1930s is consistent with a vertical short-run aggregate supply curve.

Question

Quizplus · Accepted Answer

The actual behavior of prices and real GDP during the decade of the 1930s is inconsistent with the classical model, which predicts that prices and wages would adjust downwards to restore full employment. Instead, prices and wages remained sticky, and real GDP remained far below potential. This is consistent with the Keynesian model, which argues that in periods of recession or depression, the economy can remain stuck in a low equilibrium with persistent unemployment unless government intervention is used to increase aggregate demand.

Which One of the Following Statements Is True