Question

Keynes considered full-employment GDP to be (LO5, 6) a) the normal state of economic affairs b) a rare occurrence c) an impossibility d) none of these

Short answer

According to Keynes, full-employment GDP is (b) a rare occurrence.

Step-by-step solution

Background on Keynesian Economics

John Maynard Keynes was a British economist who fundamentally changed the way economists thought about national economies and macroeconomics. Full-employment gross domestic product (GDP) is the potential output that would occur if the unemployment rate was at the natural rate of unemployment. In simple terms, at full-employment GDP, the labor market is in equilibrium, and there is no cyclical unemployment.

Examine each option for Keynes' view on full-employment GDP

Let's consider each option in the light of Keynes' thoughts: a) the normal state of economic affairs: Keynes believed that full employment is not the normal state of economic affairs as economies tend to have periods of unemployment due to economic fluctuations. b) a rare occurrence: Keynes noted that full employment could be achieved, but it's a rare occurrence because involuntary unemployment will be present in the economy during most periods other than economic booms. c) an impossibility: Keynes didn't consider full employment an impossibility; he believed it to be achievable under specific circumstances. However, he didn't think it would be a sustained condition for the economy. d) none of these: This option is not accurate as we can see that option b accurately represents Keynes' view on full-employment GDP.

Final Answer

Therefore, after considering all options, we can conclude that according to Keynes, full-employment GDP is (b) a rare occurrence.

Key concepts

Full-Employment GDP

John Maynard Keynes, a pivotal figure in economics, introduced the concept of full-employment GDP. This term refers to the maximum output an economy can achieve when unemployment is at the natural rate. Simply put, at this level, the economy is using all its resources efficiently, but it doesn't mean zero unemployment.
The concept acknowledges the presence of natural unemployment, like frictional (when people are between jobs) and structural (when workers' skills don't match job requirements). Cyclical unemployment, resulting from economic downturns, however, is absent at full-employment GDP.
In reality, full-employment GDP is not often seen as the normal state of the economy. Economic fluctuations and other factors usually prevent this ideal balance from being sustained over long periods.

Natural Rate of Unemployment

The natural rate of unemployment is a key pillar in the study of Keynesian Economics. It refers to the level of unemployment consistent with a stable rate of inflation. It encompasses only structural and frictional unemployment types.
Understanding this concept is crucial because it sets a baseline for policymakers aiming to stabilize the economy. It serves as a gauge to distinguish what part of unemployment is unavoidable and what part could be addressed by economic policy.
Keynes noted that unemployment typically exceeds the natural rate as economies experience cycles of growth and contraction. Therefore, reaching this natural rate is a sign of an economy operating at its potential without artificial or temporary inflation spikes.

Economic Fluctuations

Economic fluctuations, also known as business cycles, are the upward and downward movements of GDP and refer to the periods of expansions and contractions in economic activities.
Keynes emphasized the unpredictability of these cycles. He argued that full employment wouldn't be sustainable because economies naturally oscillate between booms and recessions due to various internal and external factors.
These fluctuations can cause unemployment levels to rise above the natural rate during downturns, thus preventing sustained full employment. Understanding these patterns is essential for developing economic policies that aim to smooth out these cycles and strive towards stability.