The Difference Between New Classical Theory and New Keynesian Theory

question 148

Multiple Choice

The difference between new classical theory and new Keynesian theory is that

• A) in new classical theory wages are assumed to be flexible,and in new Keynesian theory wages are assumed to be somewhat inflexible.
• B) in new classical theory wages are assumed to be somewhat inflexible,and in new Keynesian theory wages are assumed to be flexible.
• C) adaptive expectations is the dominant expectations theory in new classical theory,and rational expectations is the dominant expectations theory in new Keynesian theory.
• D) in new Keynesian theory the short-run aggregate supply curve is vertical,and in new classical theory the short-run aggregate supply curve is upward sloping.

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Definitions:

Volleyball

A team sport where two teams, typically of six players each, compete to ground a ball on the other team's court under organized rules.

Labor-Leisure Tradeoff

The balance individuals must find between time spent working, which earns income, and time spent enjoying leisure activities.

Substitution Effect

The change in consumption resulting from a change in the relative prices of goods, prompting consumers to replace more expensive items with less costly alternatives.

Income Effect

The shift in income for an individual or the economy, and its influence on the demand for a specific good or service.