Answer to Question #294601 in Macroeconomics for Ali

Question

What is the theory of New Keynesian economists

Answer 1

The theory of New Keynesian economists differs from the classical Keynesian economic theories in terms of how quickly prices and wages adjust. They build their macroeconomic theories on the assumption that wages and prices are flexible and advocate that prices and wages are sticky, meaning they adjust more slowly to short-term economic fluctuations. Thus, prices clear clear markets, balance supply and demand, by adjusting quickly. The market-clearing models in classical Keynesian economics cannot explain short-run economic fluctuations and so they advocate for the sticky wages and prices models. This explains economic factors such as the impact of federal monetary policies and involuntary employment.