The basic Keynesian model, also known as the Keynesian theory of economics, was developed by economist John Maynard Keynes. The key assumption of this model is that in the short run, firms meet demand at preset prices.

Here's a step-by-step explanation:

1. The Keynesian model assumes that prices are sticky, meaning they do not adjust quickly to changes in the economy. This is due to factors such as menu costs, the costs of changing prices, and the desire to avoid price wars with competitors.

2. Because prices are sticky, firms cannot quickly adjust them in response to changes in demand. Therefore, if demand increases, firms cannot immediately raise prices to bring supply and demand back into equilibrium.

3. Instead, firms meet the increased demand by increasing production. This leads to an increase in income and employment, which further increases demand. This is known as the multiplier effect.

4. Conversely, if demand decreases, firms cannot immediately lower prices to increase demand. Instead, they reduce production, leading to a decrease in income and employment, which further decreases demand. This is known as the multiplier effect in reverse.

5. Over time, prices will adjust to bring supply and demand back into equilibrium. However, in the short run, firms meet demand at preset prices. This is the key assumption of the basic Keynesian model.

Question

The basic Keynesian model, also known as the Keynesian theory of economics, was developed by economist John Maynard Keynes. The key assumption of this model is that in the short run, firms meet demand at preset prices.

Here's a step-by-step explanation:

1. The Keynesian model assumes that prices are sticky, meaning they do not adjust quickly to changes in the economy. This is due to factors such as menu costs, the costs of changing prices, and the desire to avoid price wars with competitors.

2. Because prices are sticky, firms cannot quickly adjust them in response to changes in demand. Therefore, if demand increases, firms cannot immediately raise prices to bring supply and demand back into equilibrium.

3. Instead, firms meet the increased demand by increasing production. This leads to an increase in income and employment, which further increases demand. This is known as the multiplier effect.

4. Conversely, if demand decreases, firms cannot immediately lower prices to increase demand. Instead, they reduce production, leading to a decrease in income and employment, which further decreases demand. This is known as the multiplier effect in reverse.

5. Over time, prices will adjust to bring supply and demand back into equilibrium. However, in the short run, firms meet demand at preset prices. This is the key assumption of the basic Keynesian model.

Knowee AI · Accepted Answer

The basic Keynesian model, also known as the Keynesian theory of economics, was developed by economist John Maynard Keynes. The key assumption of this model is that in the short run, firms meet demand at preset prices.

Here's a step-by-step explanation:

1. The Keynesian model assumes that prices are sticky, meaning they do not adjust quickly to changes in the economy. This is due to factors such as menu costs, the costs of changing prices, and the desire to avoid price wars with competitors.

2. Because prices are sticky, firms cannot quickly adjust them in response to changes in demand. Therefore, if demand increases, firms cannot immediately raise prices to bring supply and demand back into equilibrium.

3. Instead, firms meet the increased demand by increasing production. This leads to an increase in income and employment, which further increases demand. This is known as the multiplier effect.

4. Conversely, if demand decreases, firms cannot immediately lower prices to increase demand. Instead, they reduce production, leading to a decrease in income and employment, which further decreases demand. This is known as the multiplier effect in reverse.

5. Over time, prices will adjust to bring supply and demand back into equilibrium. However, in the short run, firms meet demand at preset prices. This is the key assumption of the basic Keynesian model.

The key assumption of the basic Keynesian model is that in the short run, firms:Group of answer choicesmeet demand at preset prices.change prices rather than quantities.operate just as they do in the long run.change prices frequently.adjust prices to bring sales in line with capacity.

Question

Solution

Similar Questions

Upgrade your grade with Knowee