Answer to Question #64052 in Macroeconomics for Emilie

Question

2)Thinking back to the business cycle discussion, how would Keynesian economists explain the performance of the economy during the last few years? Show graphically using the AD/AS model, and explain your reasoning.
Next, how would neoclassical economists explain the performance of the economy during the last few years? Show graphically using the AD/AS model, and explain your reasoning.
Which interpretation makes the most sense to you? Why?

Answer 1

Keynesian models assume frictions in markets. Prices don't adjust quickly to shifts in demand or supply, so any shock the market will show up in relatively large shifts in quantities. Prices are relatively inflexible, quantities are relatively flexible.
Neoclassical models assume much the opposite. Markets have few frictions, and prices adjust quickly and simply, meaning quantities don't change when there's a shock to supply or demand. Prices are flexible, quantities aren't.
Neoclassical models tend to work better for long-run phenomena (when prices have time to adjust), and Keynesian models tend to work better for short-run phenomena (when they don't).