EcoWeek5LJ.docx - Although not explicitly mentioned in...

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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. Keynesian economics relies on two main ideas. First, aggregate demand is more likely than aggregate supply to be the first reason for a short-run economic event sort of a recession. Second, wages and costs is sticky, and so, in an economic downturn, unemployment may result. The coordination argument states that downward wage and price flexibility requires perfect information about the extent of lower compensation acceptable to other laborers and market participants. The expenditure multiplier could be a Keynesian concept that asserts that a change in autonomous spending causes a over proportionate change in real GDP. A macroeconomic externality occurs when

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