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The Neo-Classical self corrects
It assumes that prices are downwardly flexible

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They argue that sticky wages will limit the ability of the economy to self-correct, getting stuck in the deflationary gap.

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Contractionary fiscal policy - e.g. increasing tax/interest rates, decreasing government spending

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short terminus describes the decisions that produce benefits now or soon, rather than making better decisions that will produce benefits in the future.

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short terminus describes the decisions that produce benefits now or soon, rather than making better decisions that will produce benefits in the future.

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Diminishing marginal returns refers to the idea that with each extra purchase of a good the less utility/productivity will be gained. E.g. if a farmer buys a tractor, the increase in productivity is greater that for his 2nd, 3rd, or 100th tractor.

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Fiscal Policy is carried out by the government by changing taxes and or government expenditures.

Expansionary policy is intended to boost business investment and consumer spending by injecting money into the economy either through direct government deficit spending or increased lending to businesses and consumers.

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For a recessionary gap, Keynesians would use an expansionary fiscal policy (government's manipulation of taxes in order to increase aggregate demand)

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what is ment by short-terminism?

Short termims is an approach that is better off in the short-term but worse off in the future

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This cycle can be seen as fluctuations between positive and negative GDP gaps. Keynesians believe that the solution to a recession is expansionary fiscal policy, such as tax cuts to simulate consumption and investment, or direct increases in government spending, either of which would shift the aggregate demand curve to the right.

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what is meant by the hypothesis of eventually diminishing marginal returns?

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The prescribed Keynesian remedy for an inflationary gap is contractionary fiscal policy. This is one of the two alternative output gaps that can occur when equilibrium generates production that differs from full employment. The other is a recessionary gap

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As, according to their model, any fall in AD will result in deflation and a short term fall in realGDP. But due to it's intersection with the LRAS curve there is a return to potential GDP in the long-term. This is due to the fact that during a recession the price level will drop and this means firms and consumers can more easily make investment or purchases. This process is the same with inflationary gaps but in reverse. They argue that government spending to rectify these gaps crowds out this spending by firms and consumers in a recession.

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Sticky wages are the phenomenon where wages do not fall during a recession due to firm's worry that it may demoralise workers. This means workers are let go instead.

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Sticky wages refers to the tendency of wages to react to more slowly than might otherwise be anticipated by economic theory. It actually works both ways. As prices rise (inflation), wages tend to rise more slowly than inflation until adjustment to a new equilibrium

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What policies would Keynesians use in a recessionary gap?

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What policies would Keynesians use in a recessionary gap?

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What policies would Keynesians during an  inflationary gap?

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What policies would Keynesians during an  inflationary gap?

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Why do Neo-classical economics argue that economic fluctuations in the business cycle (inflationary and deflationary gaps) will self-correct?

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Why do Neo-classical economics argue that economic fluctuations in the business cycle (inflationary and deflationary gaps) will self-correct?

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Why do Keynesians argue that the macroeconomy will not self-correct during an economic downturn?

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Why do Keynesians argue that the macroeconomy will not self-correct during an economic downturn?

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What is meant by 'sticky wages', why does this matter?

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What is meant by 'sticky wages', why does this matter?