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
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