Question
In the Keynesian vision, a typical recession might develop like this: problems in the financial system lead to a decrease in the supply of money
In the Keynesian vision, a typical recession might develop like this: problems in the financial system lead to a decrease in the supply of money (or liquidity). This leads to higher interest rates, which discourage investment. Lower desired investment causes output to fall, leading to higher unemployment. The classical model is said to offer a "triple defense" against the possibility of this kind of unemployment. What are the three features of the model that could prevent unemployment from developing in this scenario? Explain how each works, what source(s) of unemployment it protects against, and what happens instead of a rise in unemployment.
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