The key difference between the new classical theory of the business cycle and the new Keynesian theory of the business cycle is that the new classical theory believes that ________ while the new Keynesian theory believes that ________.
A) expected changes in aggregate demand will change real GDP; expected changes in aggregate demand will not change real GDP
B) only unexpected changes in aggregate demand will change real GDP; only expected changes in aggregate demand will change real GDP
C) only unexpected changes in aggregate demand will change real GDP; both expected and unexpected changes in aggregate demand will change real GDP
D) the short-run aggregate supply curve is horizontal; the short-run aggregate supply curve is vertical

Question

Quizplus · Accepted Answer

The key difference lies in how each theory views the impact of aggregate demand on real GDP. New classical theory posits that only unexpected changes in aggregate demand can alter real GDP, as individuals and firms adjust their expectations and behaviors based on anticipated changes. New Keynesian theory, however, suggests that both expected and unexpected changes in aggregate demand can affect real GDP, due to factors like price stickiness and imperfect information, which prevent immediate adjustment to new information.

The Key Difference Between the New Classical Theory of the Business