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saved by2 people, first byJim Ski on 2006-04-30, last byJoanna Yu on 2008-04-26

  • Keynesian economics promotes a mixed economy, where both the state and the private sector play an important role.

  • Beginning in the late 1950s New Classical Macroeconomists began to disagree with the methodology employed by Keynes and his successors. Keynesians emphasized the dependence of consumption on disposable income and, also, of investment on current profits and current cash flow. In addition Keynes posited a Phillips curve that tied nominal wage inflation to unemployment rate. To buttress these theories Keynesians typically traced the logical foundations of their model (using introspection) and buttressed their assumptions with statistical evidence. [4] New Classical theorists demanded that Macroeconomic be grounded on the same foundations as Microeconomic theory, profit-maximizing firms and utility maximizing consumers.[5]


    The result of this shift in methodology produced several important divergences from Keynesian Macro economics: [6]



    1. Independence of Consumption and current Income (life-cycle permanent income hypothesis)

    2. Irrelevance of Current Profits to Investment (Modigliani-Miller theorem)

    3. Long run independence of inflation and unemployment (natural rate of unemployment)

    4. The inability of monetary policy to stabilize output (rational expectations)

    5. Irrelevance of Taxes and Budget Deficits to Consumption (Ricardian Equivalence)
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