Answer to Question #48821 in Microeconomics for Dian

Question

What are the comparisons between the Neoclassical Synthesis and Keynesian theories? Aren't they similar to an extent?

Answer 1

New neoclassical synthesis or new synthesis is the fusion of the major, modern macroeconomic schools of thought, new classical and new Keynesian, into a consensus on the best way to explain short-run fluctuations in the economy. This new synthesis is analogous to the neoclassical synthesis that combined neoclassical economics with Keynesian macroeconomics. The new synthesis provides the theoretical foundation for much of contemporary mainstream economics. It is an important part of the theoretical foundation for the work done by the Federal Reserve and many other central banks.
Prior to the synthesis macroeconomics was split between new Keynesian work on market imperfections demonstrated with small models and new classical work on real business cycle theory that used fully specified general equilibrium models and used changes in technology to explain fluctuations in economic output. The new synthesis has taken elements from both schools. New classical economics contributed the methodology behind real business cycle theory and new Keynesian economics contributed nominal rigidities (slow moving and periodic, rather than continuous, price changes also called sticky prices).