Suppose the economy is suffering in a recessionary period. Firms are facing increasing inventories and individual consumers are increasing their saving to prepare for hard times ahead. What is likely to happen to the economy and can it correct itself and grow toward full employment in the short run?

Answer 1

The Keynesian view of the economy would conclude that the economy would remain in a recession and would not automatically correct itself. In fact, the economy may fall further into recession if businesses cut investment and consumers continue to increase saving, thus cutting consumption spending. Apart from a significant fall in the price level, no automatic forces exist to pump up the economy toward full employment in the short run.