DEFINITION of 'New Keynesian Economics'

The modern macroeconomic school of thought that evolved from classical Keynesian economics. This revised theory differs from classical Keynesian thinking in terms of how quickly prices and wages adjust. New Keynesian advocates maintain that prices and wages are "sticky", meaning that they adjust more slowly to short-term economic fluctuations.

This in turn explains such economic factors as involuntary unemployment and the impact of federal monetary policies.

BREAKING DOWN 'New Keynesian Economics'

New Keynesian economics as a philosophy took root in the 1980s in response to the criticisms of many of Keynes' original precepts as espoused by classical economists in the previous decade.

The new Keynesian theory attempts to address, among other things, the sluggish behavior of prices and its cause. The theory explains how market failures could be caused by inefficiencies and might justify government intervention. Whether this intervention should occur is a more complex question.

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