What two events undermined the theory that supply creates its own demand?
What will be an ideal response?
First, the Great Depression of the 1930 resulted in a sharp decline in production and high rates of unemployment over a ten-year period. This event was inconsistent with the classical theory that suggests that unemployment is only temporary. Second, John Maynard Keynes developed an aggregate expenditures theory that countered Say’s law and explained why unemployment and under spending can occur in an economy. Keynes’ modern employment theory suggests that the macro economy was inherently unstable and subject to fluctuations in output and employment because of the downward inflexibility of wages and prices and lack of synchronization between investment and saving decisions.
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In its macroeconomic equilibrium, the economy can be producing at
i. below full employment. ii. full employment. iii. above full employment. A) i only B) ii only C) iii only D) i or ii E) i, ii, or iii
The "invisible hand" refers to
a. the marketplace guiding the self-interests of market participants into promoting general economic well-being. b. the fact that social planners sometimes have to intervene, even in perfectly competitive markets, to make those markets more efficient. c. the equality that results from market forces allocating the goods produced in the market. d. the automatic maximization of consumer surplus in free markets.