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 ▸How does an Expansionary Fiscal Policy affect the Real GDP of an Economy?
Explain the different types of unemployment.
Using a diagram, show how a polluting factory may cause a negative externality to society, and how a tax might be used to solve this market failure.
What is the effect of an indirect tax on the cigarette market?