Read the following report carefully and answer the questions on the basis of the same:
Along with the weakening of global economic activity, inflation the world over also remained muted in 2019. Inflation softened in advanced and emerging economies reflecting a slack in consumer demand. From the supply side, lower energy prices in 2019 also contributed to softening of inflation. In India, inflation rose slightly to 4.1% in April - December 2019, after a sharp decline from 5.9% in 2014 to 3.4% in 2018.
The impact of the above situation under the Keynesian theory of income and employment in an economy is?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Decrease in income, output and employment.
According to Keynesian theory of income and employment, the level of aggregate demand plays a crucial role in determining the overall level of income, output, and employment in an economy. From the report:
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There is weakening of global economic activity
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Inflation remains muted due to a slack in consumer demand
This indicates a situation of deficient demand, which, under Keynesian theory, leads to:
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Fall in output (as producers reduce production)
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Fall in income (due to lower production and sales)
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Fall in employment (as firms reduce their workforce in response to lower demand)