The New Keynesian Economics

New Keynesian Economics is a modern approach to understanding how economies work, especially during periods like recessions. It builds on traditional Keynesian ideas but incorporates ideas from microeconomics, such as how individual markets and prices operate. It explains that wages and prices can be sticky, meaning they don’t adjust quickly, leading to periods of unemployment or output gaps. This framework supports the use of government policies like interest rate adjustments and fiscal stimulus to stabilize the economy, emphasizing that short-term fluctuations are partly due to these rigidities, even in a well-functioning market system.