Assume an economy is operating below full employment. Following an increase in government spending, which of the following is most likely according to a Keynesian?
Nominal wages will be falling and the unemployment will disappear.
Real GDP will increase, the price level will increase, and unemployment will fall.
As aggregate demand increases, workers will immediately know that their real wage has fallen and will demand a higher wage, shifting in the aggregate supply curve. There will be no decrease in unemployment.
With no cyclical unemployment present, this increase in aggregate demand will only increase the price level.