The new "Keynesian economics" is a current macroeconomic school that emerged from

the classical form of the old "Keynesian economics"(Liberto, 2021). The main points of
contention between traditional and modern Keynesians are the use of terminologies, the
optimization of price flows, etc. and the assumptions about how quickly wages and
prices will adjust are paramount to both the theory and the New Keynesian economy.
According to neoclassical economists, wages and prices are fluid and can be adjusted
fairly quickly without much difficulty, making market supply and demand as flexible as
prices. Of course every situation is different, but basically it's alright (Amadeo, 2021).

A new generation of Keynesian economists believes that market liquidation models do

not take short-term economic changes into account. New Keynesian economists argue
that prices and wages are sticky, meaning they react slowly to short-term economic
shocks. Proponents of New Keynesian economics use "sticky" wages and prices to
explain why involuntary unemployment exists and how federal monetary policy affects it
(Keynesian Economics in a Nutshell, n.d.).

Because prices react slowly to changes in the money supply, Keynesians emphasize that
monetary policy affects employment and output in the short run. (What Is Keynesian
Economics? - Back to Basics - Finance & Development, 2014). As a result, when the
money supply declines, consumers are less willing to spend money and demand for
goods declines. Also, since prices and wages are rigid, they are not immediately affected
by a decrease in the money supply. But these spending cuts will lead to lower demand,
which in turn will lead to lower production, which in turn will lead to job losses.

New classical economics on the other hand contradicts this because it lacks sufficient
rationale to explain, or perhaps even condone the fact that prices are not at a certain
level and where they should be.

Reference

Amadeo, K. (2021, December 30). Keynesian Economics Theory. The

Balance. https://www.thebalance.com/keynesian-economics-theory-definition-
4159776

Liberto, D. (2021, March 24). New Keynesian Economics: Definition and Vs.
Keynesian. Investopedia. https://www.investopedia.com/terms/n/new-keynesian-
economics.asp
What Is Keynesian Economics? - Back to Basics - Finance & Development. (2014, August
27). https://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm

Keynesian Economics in a Nutshell. (n.d.). https://www.maynardkeynes.org/maynard-

keynes-economics.html