cordination failure - One of the basic principles of the New Keynesian is the model of \u201csticky\u201d prices(Mankiw n.d The model of sticky prices

cordination failure - One of the basic principles of...

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One of the basic principles of the New Keynesian is the model of “sticky” prices (Mankiw, n.d). The model of sticky prices are meant to address the limitation of classic Keynesian theory that believes “prices, and most especially wages, respond slowly to the changes in supply and demand, which result in periodic shortages and surpluses, especially of labor” (Blinder, n.d.). New classical economists debated this theory as lack of coherent explanation. The new classical economists believe market-clearing model, although, new Keynesian believes this model cannot explain the fluctuation in the short-run economy, and so they advocate the model with “sticky” prices and wages (Mankiw, n.d.). According to the new Keynesian, one of the reasons why prices and wages move sluggishly in response to changes in money supply because it is

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