New Keynesian Economics
Definition of 'New Keynesian Economics'
New Keynesian economics is a synthesis of Keynesian economics and neoclassical economics. Keynesian economics emphasizes the role of aggregate demand in determining an economy's output and inflation. Neoclassical economics emphasizes the role of aggregate supply in determining an economy's output and inflation. New Keynesian economics combines these two perspectives to argue that both aggregate demand and aggregate supply are important in determining an economy's output and inflation.
New Keynesian economics is based on the following assumptions:
* Markets are not always efficient.
* There are nominal rigidities in the economy.
* There is imperfect information in the economy.
* There are government failures.
The first assumption, that markets are not always efficient, means that prices do not always adjust quickly to changes in supply and demand. This can lead to macroeconomic imbalances, such as unemployment and inflation.
The second assumption, that there are nominal rigidities in the economy, means that wages and prices do not always adjust quickly to changes in the economy. This can also lead to macroeconomic imbalances.
The third assumption, that there is imperfect information in the economy, means that economic agents do not always have all the information they need to make optimal decisions. This can also lead to macroeconomic imbalances.
The fourth assumption, that there are government failures, means that government policies can sometimes have unintended consequences. This can also lead to macroeconomic imbalances.
New Keynesian economists argue that government intervention can sometimes be necessary to stabilize the economy. However, they also argue that government intervention should be used carefully, as it can also have unintended consequences.
New Keynesian economics has been influential in the development of macroeconomic policy in recent years. The policies of the Federal Reserve and other central banks are based on New Keynesian principles. New Keynesian economics has also been used to justify government intervention in the economy, such as the stimulus packages that were implemented in the wake of the 2008 financial crisis.
New Keynesian economics is a complex and evolving school of thought. It is still being debated by economists today. However, it has had a significant impact on the way we think about macroeconomics and macroeconomic policy.
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