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In the New Keynesian Macroeconomics business cycles are driven by demand shocks, while in the New...

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Economics

In the New Keynesian Macroeconomics business cycles are drivenby demand shocks, while in the New Classical Macroeconomics theyare driven by supply shocks. Explain this statement using yourknowledge of the AD-AS model.
(the answer should be between 1/2 page to 3/4 pagepreferrably, not necessary though)

Answer & Explanation Solved by verified expert
4.1 Ratings (845 Votes)
Keynesian economics is based on twomain ideas1 aggregate demand is more likely than aggregate supply to bethe primary cause of a shortruneconomic event like a recession2 wages and prices can be sticky and so in aneconomic downturn unemployment can resultThe shortrun aggregate supply or SRAS curve can be dividedinto three zonesthe horizontal Keynesian zone the verticalneoclassical zone and the upward sloping intermediate zone inbetween the Keynesian and neoclassical zonesKeynes Law states that demand creates its ownsupply changes in aggregate demand cause changes in real GDP andemploymentThe Keynesian zone occurs at low levels of output on the SRAScurve where it is fairly flat so movements in aggregate demandwill affect output but have little effect on the price levelSays Law states that supply creates its owndemand changes in aggregate demand have no effect on real grossdomestic product or employment only on the price levelSays Law can be shown on the vertical neoclassical zone of theaggregate supply curve The neoclassical zone occurs at the rightof the SRAS curve where it is fairly vertical so movements inaggregate demand will affect the price level but have little impacton outputThe intermediate zone in the middle    See Answer
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