A central conclusion of Keynesian economics is that there is no strong automatic tendency for output and employment to move toward full employment levels. This conflicts with classical economics, which assumes a general tendency towards equilibrium in a restrained money creation economy (Banguero 25)
Because prices and wages are inflexible and don't fall immediately, the decreased spending causes a drop in production and layoffs of workers. New classical economists criticized this tradition because it lacked a coherent theoretical explanation for the sluggish behavior of prices (Baum 47)
Even though monetarists are more confident than Keynesians in the ability of markets to adjust to changes in supply and demand, many monetarists accept the Keynesian position on this matter. Milton Friedman, for example, the most prominent monetarist, has written: "Under any conceivable institutional arrangements, and certainly under those that now prevail in the United States, there is only a limited amount of flexibility in prices and wages" (Friedman 58)
During the 1980's, most of the world's industrial economies endured deep and long recessions. According to new classical theory, a correctly perceived decrease in the growth of the money supply should have only small effects, if any, on real output (Ingham 81)
Keynesian economics is an economic theory based on the ideas of John Maynard Keynes (Jackson 29)
The importance of money essentially flows from its being a link between the present and the future" (Keynes). Several principles are central to Keynesianism (Kant 109)
. I myself held with conviction for many years the theories which I now attack, and I am not, I think, ignorant of their strong points" (Keynes)
Staggering can make the overall level of prices adjust slowly, even when individual prices change frequently (Banguero 35). Another important part of new Keynesian economics has been the development of new theories of unemployment (Mariano 530)
This dilemma led to the rise of ideas based upon more classical analysis, including monetarism, supply-side economics, and new classical economics. This produced a policy bind and the collapse of the Keynesian consensus on the economy (Navarro 552)
New Keynesian economists, however, believe that market-clearing models cannot explain short-run economic fluctuations, and so they advocate models with "sticky" (Friedman 154) wages and prices . New Keynesian theories rely on this stickiness of wages and prices to explain why involuntary unemployment exists and why monetary policy has such a strong influence on economic activity (Richardson and McKie 271)
Gradually, shortcomings of fiscal policy became apparent. The shortcomings stem from timing, politics, macroeconomic theory, and the deficit itself" (Samuelson and Nordhaus 268)