Chapter 9.6

Question 1

What is the difference between monetarist/new classical economic thinking and Keynesian thinking towards deflationary gaps in the long run?

Answer 1

Keynesian model shows that an economy can remain for long periods of time in an equilibrium where there is less than full employment due to insufficient AD, as opposed to deflationary gaps being automatically corrected in new classical thinking

Question 2

What is the difference between monetarist/new classical economic thinking and Keynesian thinking towards increases in aggregate demand?

Answer 2

In the Keynesian view increases in aggregate demand do not always result in a higher price level