Summary of Neoclassical Economics versus Keynesian Economics
Summary of Neoclassical Macroeconomic Policy Recommendations
Let’s summarize what neoclassical economists recommend for macroeconomic policy. Neoclassical economists do not believe in “fine-tuning” the economy. They believe that economic growth is fostered by a stable economic environment with a low rate of inflation. Similarly, tax rates should be low and unchanging. In this environment, private economic agents can make the best possible investment decisions, which will lead to optimal investment in physical and human capital as well as research and development to promote improvements in technology.
Summary of Neoclassical Economics versus Keynesian Economics
The table below summarizes the key differences between the two schools of thought.
Neoclassical versus Keynesian Economics
| Summary | Neoclassical Economics | Keynesian Economics |
|---|---|---|
| Focus: long-term or short term | Long-term | Short-term |
| Prices and wages: sticky or flexible? | Flexible | Sticky |
| Economic output: Primarily determined by aggregate demand or aggregate supply? | Aggregate supply | Aggregate demand |
| Aggregate supply: vertical or upward-sloping? | Vertical | Upward-sloping |
| Phillips curve vertical or downward-sloping | Vertical | Downward sloping |
| Is aggregate demand a useful tool for controlling inflation? | Yes | Yes |
| What should be the primary area of policy emphasis for reducing unemployment? | Reform labor market institutions to reduce natural rate of unemployment | Increase aggregate demand to eliminate cyclical unemployment |
| Is aggregate demand a useful tool for ending recession? | At best, only in the short-run temporary sense, but may just increase inflation instead | Yes |
This lesson is part of:
The Neoclassical Perspective
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