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What are the key differences between traditional, open-economy macroeconomics and modern macroeconomics (new Keynesian macroeconomics)?

Economics Dec 12, 2020

What are the key differences between traditional, open-economy macroeconomics and modern macroeconomics (new Keynesian macroeconomics)?

Expert Solution

Both microeconomics differ in different aspects, such as

Government intervention view in Keynesian

Government intervention makes more sense in the new Keynesian microeconomics than the classical theory. In-state of crises where people are not spending government fills the gap by use of earned revenue from, e.g., taxes. On the other hand, investors consider high fees on a business as an expense that can be utilized to grow the company.

Classical view on the free market

Here, people create demand for their commodities, and they also provide labor during production to earn wages. This cycle builds confidence in its supports since no intervention is required. Keynesian consider other factors like natural disasters, that if they occur, intervention is necessary.

Price and market influence

Keynesian's require the government to try and maintain stable prices while the old open microeconomics believes that a free market can find its levels of demand and supply equilibrium.

Unemployment

Keynes supporters still believe that the government will create jobs, but for the traditional open microeconomics, employment levels are adequately catered for by the economy.

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