Neoclassical View of Recessions
What is the Neoclassical View of Recessions?
Written by J. Mance Gordon
Updated at April 23rd, 2024
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
-
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
- Courses
What is the Neoclassical View of Recessions?
Neoclassical economists believe that the economy will rebound out of a recession or eventually contract during an expansion because prices and wage rates are flexible and will adjust either upward or downward to restore the economy to its potential GDP. Thus, the key policy question for neoclassicals is how to promote growth of potential GDP. We know that economic growth ultimately depends on the growth rate of long-term productivity. Productivity measures how effective inputs are at producing outputs. We know that U.S. productivity has grown on average about 2% per year. That means that the same amount of inputs produce 2% more output than the year before. We also know that productivity growth varies a great deal in the short term due to cyclical factors. It also varies somewhat in the long term.
The neoclassical economists believe the underpinnings of long- run productivity growth to be an economy’s investments in human capital, physical capital, and technology, operating together in a market-oriented environment that rewards innovation. Government policy should focus on promoting these factors.
Related Topics
- Keynesian Perspective of Aggregate Demand
- Recessionary and Inflationary Gap
- Consumption Expenditure
- Investment Expenditure
- Government Spending in Aggregate Demand
- Net Exports in Aggregate Demand
- Keynesian Economic Analysis
- Wage and Price Stickiness
- Coordination Argument of Wage Stickiness
- What are Menu Costs
- Keynesian Assumptions in the Aggregate Demand and Aggregate Supply Model
- Macroeconomic Externality
- Expenditure Multiplier
- The Phillips Curve
- Keynesian Approach to Unemployment and Inflation
- Keynesian Perspective on Market Forces
- NeoClassical Economics
- Long Run Potential GDP
- Physical Capital Affects Productivity
- Potential GDP in the Aggregate Demand Aggregate Supply Model
- Prices are Flexible in the Long Run
- Keynesian and NeoClassical View of Long-Run Aggregate Supply and Demand
- Speed of Macroeconomic Adjustment of Wages and Prices
- Paradox of Rationality
- Rational Expectations Theory
- Shapley Value
- Mechanism Design Theory
- What is the Adaptive Expectations Theory
- Measure Inflation Expectations
- Neoclassical Phillips Curve Tradeoff
- Neoclassical View of Unemployment
- Neoclassical View of Recessions
- Keynesian vs Neoclassical Macroeconomic Policy Recommendations