An unexpected decrease in aggregate demand will trigger a recession in the ________ theory of the business cycle.
A) new Keynesian cycle
B) new classical cycle
C) real business cycle
D) Both answers A and B are correct.

Question

Quizplus · Accepted Answer

The new Keynesian and new classical theories both suggest that an unexpected decrease in aggregate demand can trigger a recession, albeit for different reasons. New Keynesians focus on price and wage stickiness preventing the economy from adjusting quickly, while new classicals emphasize how misperceptions about prices can lead to reduced demand for labor.

An Unexpected Decrease in Aggregate Demand Will Trigger a Recession