LEARNING JOURNAL UNIT 5 ECONS 1580.docx - Sticky prices model(Mankiw n.d is one of the basic principles of the New Keynesian Economics and it was

LEARNING JOURNAL UNIT 5 ECONS 1580.docx - Sticky prices...

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Sticky prices model (Mankiw, n.d) is one of the basic principles of the New Keynesian Economics and it was supposed to solve the classic Keynesian theory limitation that believe that “prices and wages, respond slowly to the changes in supply and demand, which result in periodic shortages and surpluses, especially of labor” (Blinder, n.d) The new Keynesian believed that one major reason why prices and wages slowly response to changes in money supply is as a result of the fact that it is quite expensive to adjust cost. An example is menu cost for a restaurant in order to print a new menu. This cost makes firms reluctant to adjust prices quickly (Mankiw, n.d). New Keynesian believes that the market clearing model was unable explain their fluctuation in the short run economy, unlike the new classical economists debated this theory as lack of logical and consistent explanation. This was the reason for the implementation of the “sticky” prices and wages model (Mankiw, n;d). Blinder, A. S. (n.d.). Keynesian Economics. Retrieved October 5, 2019, from Mankiw, N. G. (n.d.). New Keynesian Economics. Retrieved October 5, 2019, from

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