In the New Keynesian Macroeconomics business cycles are driven by demand shocks, while in the New...

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Economics

In the New Keynesian Macroeconomics business cycles are drivenby demand shocks, while in the New Classical Macroeconomics theyare driven by supply shocks. Explain this statement using yourknowledge of the AD-AS model.

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The shortrun aggregate supply or SRAS curve can be dividedinto three zonesthe horizontal Keynesian zone the verticalneoclassical zone and the upward sloping intermediate zone inbetween the Keynesian and neoclassical zonesKeynes Law states that demand creates its ownsupply changes in aggregate demand cause changes in real GDP andemploymentThe Keynesian zone occurs at low levels of output on the SRAScurve where it is fairly flat so movements in aggregate demandwill affect output but have little effect on the price levelSays Law states that supply creates its owndemand changes in aggregate demand have no effect on real grossdomestic product or employment only on the price levelSays Law can be shown on the vertical neoclassical zone of theaggregate supply curve The neoclassical zone occurs at the rightof the SRAS curve where it is fairly vertical so movements inaggregate demand will affect the price level but have little impacton outputThe intermediate zone in the middle of the SRAS curve isupwardsloping so a rise in aggregate demand will cause higheroutput and price level while a fall in aggregate demand will leadto a lower output and price levelKeynes Law and Says Law See Answer

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