What is the key difference between the Keynsian and the Neo-Classical schools of thought? Explain using a diagram.
The Neo-Classical school of thought is built under the assumption of prices being flexible in both directions(upwards or downwards). On the other hand, Keynes suggested that wages are inflexible downwards, resulting to 'sticky prices'. This results in a flat and then vertical Aggregate Supply curve, with a small upward sloping section in between them. This is different to the normal upward sloping Neo-Classical AS curve.
GM
Related Economics IB answers
All answers ▸What are minimum prices and what are the effects of minimum prices?
Evaluate the view that economic growth is best achieved through improvements in technology
Explain how fiscal policy could be employed to pull an economy out of a recessionary gap
If a country wishes to depreciate their own currency, how could they do so in terms of monetary policy? List three possible effects depreciating their currency will have on the economy.