The new Keynesian theories which are based on microeconomic foundations assert that
A)unanticipated fiscal policy changes cannot affect the output level in the short run
B)anticipated monetary policy changes have no real short-run effect on output
C)under imperfect competition individual actions of consumers or firms can lead to socially undesirable outcomes
D)markets tend to be perfectly competitive, so firms are price takers
E)most firms have considerable monopoly power, so they change their prices immediately after a disturbance has occurred

Question

Quizplus · Accepted Answer

New Keynesian theories recognize the presence of market imperfections and argue that individual actions of consumers and firms can lead to socially undesirable outcomes. This is due to imperfect competition, contrary to option D which suggests that markets tend to be perfectly competitive. Option A is incorrect because unanticipated fiscal policy changes can affect the output level in the short run. Option B is incorrect because anticipated monetary policy changes can have real short-run effects on output. Option E is incorrect because most firms do not have considerable monopoly power, and they do not change their prices immediately after a disturbance has occurred.

The New Keynesian Theories Which Are Based on Microeconomic Foundations