Question

J.M Keynes is credited with three major changes to the Classical model which among other things made the determination of real output and employment dependent on fiscal policy (G*,T*):
(1) He introduced an liquidity motive for holding money;
(2) he introduced wage/price stickiness;
(3) he employed the consumption function in a new way.
A.   Explain how (1)-(3) led to the conclusion that fiscal policy could have impact on real output and employment (which the Classical theory had said could not happen).
B.   In your opinion (that means there is not necessarily a “correct” answer), which would you argue is the most important “Keynesian” feature—i.e., (1), (2), or (3)—making real output and employment to depend on fiscal policies?

Answer 1

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