An Important Difference Between the New Classical and New Keynesians

question 27

Multiple Choice

An important difference between the new classical and new Keynesians views is that new classicals

• A)assume that all firms are price takers, but new Keynesians assume that some firms are price setters.
• B)take into account the existence of long-term nominal wage and price contracts, but new Keynesians do not believe they are important.
• C)focus on the importance of investment spending, but new Keynesians believe that government spending is more important.
• D)believe that the aggregate supply curve is horizontal, even in the short run, but new Keynesians believe that the aggregate supply curve slopes upward in the short run.

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Definitions:

Interest Rate

is the percentage of a loan amount charged by the lender to the borrower for the use of assets.

Net Present Value

A calculation that compares the present value of a project's cash inflows to its cash outflows, used to assess the viability or profitability of an investment.

Interest Rate

The percentage of a loan that incurs interest costs for the borrower, often stated as an annual rate of the outstanding loan amount.

Net Present Value

A calculation that compares the value of all future cash flows of a project, discounted back to the present, to the initial investment.