Question

The difference between new classical theory and new Keynesian theory is that Question 2 options: in new classical theory wages are assumed to be flexible, and in new Keynesian theory wages are assumed to be somewhat inflexible.

Answer 1

Group of answer choices.

A. in new classical theory wages are assumed to be flexible, and in new Keynesian theory wages are assumed to be somewhat inflexible.

B. in new classical theory wages are assumed to be somewhat inflexible, and in new Keynesian theory wages are assumed to be flexible.

C. adaptive expectations is the dominant expectations theory in new classical theory, and rational expectations is the dominant expectations theory in new Keynesian theory.

D. in new Keynesian theory the short-run aggregate supply curve is vertical, and in new classical theory the short-run aggregate supply curve is upward sloping.

Answer:

A. in new classical theory wages are assumed to be flexible, and in new Keynesian theory wages are assumed to be somewhat inflexible.

Explanation:

The new classical theory (neoclassical view) posits that long-term expansion of potential Gross Domestic Products (GDP) due to economic growth will determine the size of a country's economy but the economy cannot sustain production above its potential Gross Domestic Products (GDP) in the long run.

John Maynard Keynes was a British economist born on the 5th of June, 1883 in Cambridge, England. He was famous for his brilliant ideas on government economic policy and macroeconomics which is known as the Keynesian theory. He later died on the 23rd of April, 1946 in Sussex, England.

According to the new Keynesian theory, government spending or expenditures should be increased and taxes should be lowered when faced with a recession, in order to create employment and boost the buying power of consumers.

Hence, the difference between the new classical theory (neoclassical view) and new Keynesian theory is that, in new classical theory wages are assumed to be flexible by economists while in new Keynesian theory wages are assumed to be somewhat inflexible.