New Keynesianism

Question 1

What is New Keynesianism motivated by?

Answer 1

An unwillingness to believe that unemployment is voluntary. (suck it New Classicalism and RBC)

Question 2

What is the Expectations-Augmented Phillips Curve driven by?

Answer 2

Uncertainty
Asymmetric information (imbalanced information)
Nominal and real rigidities

Question 3

What are nominal rigidities?

Answer 3

1. Menu costs
2. Cautious response to uncertainty
3. Quality and price considerations - compare apples to apples
4. Markets for employees: benefits programs create switching costs
5. Thick versus thin markets (thick markets have more consumption and competition)

Question 4

What are real rigidities?

Answer 4

1. Efficiency wages (to avoid shirking)

2. Insider/outsider wage differential (higher turnover makes this more important)

Question 5

What are the two fundamental beliefs behind New Keynesianism?

Answer 5

1. Money is non-neutral (you can affect the economy by changing the money supply)
2. Real market imperfections are crucial for understanding economic fluctuations.

(The answer to both is yes)