Answer to Question #327710 in Macroeconomics for Ram

Question

Critically analyze the New Keynesian approach to explain business cycles.

Answer 1

New Keynesian theory explains the reduction in welfare by a failure in economic coordination: because wages and prices do not adjust instantaneously to equate supply and demand in all markets, some gains from trade go unrealized in a recession. In contrast, real business cycle theory allows no unrealized gains from trade.