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Encyclopedia > New Keynesian economics

New Keynesian economics developed partly in response to new classical economics. It strives to provide microeconomic foundations to Keynesian economics by showing how imperfect markets can justify demand management by the government or its central bank. The main assumption of New Keynesian economics that distinguishes it from the new classical economics is that wages and prices do not adjust instantly to allow the economy to attain full employment. (This price and wage stickiness is explained using microeconomic theory.) Thus, unemployed resources and non-clearing markets can exist and persist, even when rational expectations apply. New Classical Economics emerged as a school in Macroeconomics during the 1970s. ... Keynes reading from his General Theory Keynesian economics (pronounced KAYNzian), is an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s. ... New Classical Economics emerged as a school in Macroeconomics during the 1970s. ... In economics, full employment has more than one meaning. ... This article does not cite its references or sources. ... Dorothea Langes Migrant Mother depicts destitute pea pickers in California during the Great Depression. ... Rational expectations is a theory in economics originally proposed by John F. Muth (1961). ...


A commonly used explanation that New Keynesians use to explain why prices adjust slowly is “menu costs”. This is saying that the reason firms do not change their prices immediately is due to the costs that they must incur in order to do so. For instance, the cost of making a new catalog, price list, or menu is considered menu costs. Even though such a cost seems minor, New Keynesians explain how it can cause short-run fluctuations. Not only do the firms have to pay to change the price, but there are also externalities that go along with changing prices (Mankiw). As Mankiw describes, a firm that lowers its prices because of a decrease in the money supply will be raising the real income of the customers of that product. This will allow the buyers to purchase more, which will not necessarily be from the firm that lowered their prices. So firms will hesitate before doing so, because they do not want to assist other company’s sales.


History

Economists never get together at conventions to standardize names, but in the vernacular there is a family relationship between the "neoclassical synthesis," "neo-Keynesianism," and "new Keynesianism." The "neoclassical synthesis" arose after World War II, with Paul Samuelson: the idea was that the government and the central bank would maintain rough full employment, so that neoclassical notions -- centered on the axiom of the universality of scarcity -- would apply. Combatants Allied Powers Axis Powers Commanders {{{commander1}}} {{{commander2}}} Strength {{{strength1}}} {{{strength2}}} Casualties 17 million military deaths 7 million military deaths {{{notes}}} World War II, also known as the Second World War, was a military conflict that took place between 1939 and 1945. ... Paul A. Samuelson (born May 15, 1915) is an American economist known for his work in many fields of economics. ... Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ... Scarcity is a central concept in economics. ...


Led by economists such as James Tobin and Franco Modigliani, neo-Keynesianism is based on the synthesis but puts more emphasis on microfoundations, the use of Walrasian general equilibrium theory in macroeconomics. This developed over time. It is often contrasted with the post-Keynesianism of Paul Davidson, et al., which emphasizes the role of fundamental uncertainty in economic life, especially concerning issues of private fixed investment. James Tobin (March 5, 1918 – March 11, 2002) was a United States economist. ... Franco Modigliani (June 18, 1918 – September 25, 2003) was an Italian-American economist at the MIT Sloan School of Management, and winner of The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1985. ... Post-Keynesian economics is a school of thought which is based on the ideas of John Maynard Keynes. ... Paul Davidson (born August 17, 1971) is an American screenwriter, author and television producer who was born in Smithtown, New York . ... // Relation between uncertainty, probability and risk In his seminal work Risk, Uncertainty, and Profit, Frank Knight (1921) established the important distinction between risk and uncertainty: … Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. ... Fixed investment in economics refers to an increase in the amounts of real capital goods (real means of production) used in production or to the replacement of depreciated capital goods. ...


New Keynesianism, associated with Gregory Mankiw, once chair of the Council of Economic Advisors under President George W. Bush, is a response to the Robert Lucas and the new classical school. That school criticized the inconsistencies of the neo-Keynesian school in light of the concept of "rational expectations." The new classicals combined a unique market-clearing equilibrium (at full employment) with rational expectations. The New Keynesians say: we have "microfoundations" that indicate that markets do not clear because of price stickiness. Thus, there is no unique equilibrium in the short run. Thus, the rational expectations-based critique doesn't apply. Categories: Stub | 1958 births | Economists ... The Council of Economic Advisers is a group of economists set up to advise the President of the United States. ... George Walker Bush (born July 6, 1946) is the 43rd and current President of the United States. ... Robert Lucas (April 1, 1781 – February 7, 1853) was the 12th governor of Ohio from 1832 to 1836. ... New Classical Economics emerged as a school in Macroeconomics during the 1970s. ... Rational expectations is a theory in economics originally proposed by John F. Muth (1961). ... In economics, market clearing refers to either a simplifying assumption made by the new classical school that markets always go to where the quantity supplied equals the quantity demanded; or the process of getting there via price adjustment. ... Look up equilibrium in Wiktionary, the free dictionary. ... In economics, full employment has more than one meaning. ...


Whereas the neoclassical synthesis hoped that fiscal and monetary policy would maintain full employment, the new classicals assumed that price and wage adjustment would automatically attain this situation in the short run. The new Keynesians, on the other hand, see full employment as being automatically achieved only in the long run, since prices are "sticky" in the short run. Government and central-bank policies are needed because the "long run" may be very long. Fiscal Policy is the economic term which describes the actions of a governmetn in setting the level of public expenditure and how that expenditure is funded. ... Monetary policy is the process of managing money supply to achieve specific goals—such as constraining inflation, achieving full employment or economic growth. ... In economics, full employment has more than one meaning. ... New Classical Economics emerged as a school in Macroeconomics during the 1970s. ...


Recent studies (e.g. Golosov and Lucas) find that the size of the menu cost needed to match the micro-data of price adjustment is implausibily large to justify the menu-cost argument.


See also

Keynes reading from his General Theory Keynesian economics (pronounced KAYNzian), is an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s. ... John Maynard Keynes provided the framework for synthesizing a host of economic ideas present between 1900 and 1940, and that synthesis bears his name. ...

External link

Macroeconomic schools of thought Macroeconomics is the economics sub-field of study that considers aggregate behavior, i. ...

Keynesian economics | Monetarism | New classical economics | New Keynesian economics | Neo-Keynesian Economics | Austrian School | Supply-side economics | Post-Keynesian economics
Keynes reading from his General Theory Keynesian economics (pronounced KAYNzian), is an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s. ... Monetarism is a set of views concerning the determination of national income and monetary economics. ... New Classical Economics emerged as a school in Macroeconomics during the 1970s. ... John Maynard Keynes provided the framework for synthesizing a host of economic ideas present between 1900 and 1940, and that synthesis bears his name. ... The Austrian School is a school of economic thought that rejects opposing economists reliance on methods used in natural science for the study of human action, and instead bases its formalism of economics on relationships through logic or introspection called praxeology. ... Supply-side economics is a school of macroeconomic thought which emphasizes the importance of low taxation and of business incentives in encouraging economic growth, in the belief that businesses and individuals will use their improved terms of trade to create new businesses and expand old businesses, which in turn will... Post-Keynesian economics is a school of thought which is based on the ideas of John Maynard Keynes. ...


  Results from FactBites:
 
Keynesian economics (1100 words)
Keynesian economics (aka Keynesianism) is a theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936.
The key central conclusion of Keynesian economics is that there is no strong automatic tendency for the level of output and employment in the economy to move toward the full employment level.
The typical textbook Keynesian analysis suggested that government policy should be used to stimulate demand in response to the unemployment, but reduce it in response to inflation, leading to a contradiction.
Keynesian economics - dKosopedia (3845 words)
Keynesian economics, or Keynesianism, is an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s.
Instead of the economic process being based on continuous "supply side" improvements in potential output, as most classical economics had focused on from the late 1700s, Keynes asserted the importance of the aggregate demand for goods as the driving factor, especially in downturns.
The heart of the new Keynesian view rests on microeconomic models that indicate that nominal wages and prices are "sticky," i.e., do not change easily or quicky with changes in supply and demand, so that quantity adjustment prevails.
  More results at FactBites »

 
 

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