Answer to Question #248336 in Economics for Tenn

Question

Although not explicitly mentioned in Chapter 20, John Maynard Keynes is considered a foundational source in the understanding of macroeconomics. After performing research outside the textbook, please explain in three well-structured paragraphs the basic principles of the New Keynesian Economics and how it addresses perceived limitations to classic Keynesian theory.

Answer 1

New Keynesian advocates maintain that prices and wages are "sticky," meaning they adjust more slowly to short-term economic fluctuations. This, in turn, explains such economic factors as involuntary unemployment and the impact of federal monetary policies.

Criticisms of Keynesian Economics - Borrowing causes higher interest rates and financial crowding out. Keynesian economics advocated increasing a budget deficit in a recession. However, it is argued this causes crowding out. For a government to borrow more, the interest rate on bonds rises.