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The Main Difference Between New Classical and New Keynesian Theory

question 120

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The main difference between new classical and new Keynesian theory is with respect to the assumption of


Definitions:

Optimal Level

The most efficient, effective, or desirable point or state for a specific objective or condition.

Shift

Movement of a supply or demand curve on a graph, indicating a change in equilibrium quantity and/or price in the market.

Subsidy

Financial support extended by the government to a sector, industry, or individual, intended to promote economic and social policy objectives.

Negative Externality

A cost imposed without compensation on third parties by the production or consumption of sellers or buyers. Example: A manufacturer dumps toxic chemicals into a river, killing fish prized by sports fishers. Also known as an external cost or a spillover cost.

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