Political Economy Keynesian Economics Questions Medium
Neo-Keynesian economics views price stickiness as a crucial factor in understanding the functioning of the economy. Price stickiness refers to the tendency of prices to adjust slowly in response to changes in demand and supply conditions. According to Neo-Keynesian economists, price stickiness can lead to market inefficiencies and result in periods of unemployment and economic downturns.
Neo-Keynesians argue that in the short run, prices are not flexible enough to fully adjust to changes in demand and supply. This means that when there is a decrease in aggregate demand, firms may not immediately lower prices, leading to a decrease in output and employment. Similarly, when there is an increase in aggregate demand, firms may not quickly raise prices, resulting in excess demand and potential inflationary pressures.
In this context, Neo-Keynesians emphasize the importance of government intervention to stabilize the economy. They advocate for active fiscal and monetary policies to address the negative effects of price stickiness. For example, during periods of economic downturns, Neo-Keynesians suggest that the government should increase government spending or reduce taxes to stimulate aggregate demand and boost economic activity. Conversely, during periods of inflationary pressures, they recommend tightening monetary policy to reduce aggregate demand and control inflation.
Overall, Neo-Keynesian economics recognizes the role of price stickiness in shaping economic outcomes and emphasizes the need for government intervention to mitigate the negative effects of price rigidities and stabilize the economy.