New Keynesians argue that prices and wages are sticky.?

[ESME]

New Keynesians argue that prices and wages are sticky. Explain how sticky wages might result in increased production in the Short run in response to increases in AD (aggregate demand). What would a Real Business Cycle economist say about the New Keynesian assertion?

 

[JohnM]

Because wages are sticky, they do not fall as fast as they would otherwise fall during times of slack demand. During periods of recession, productivity falls because no increases are anticipated. When the demand moves back up, productivity improves due to improved prospects for increases in wages in the future.

A real business cycle economist would say that shocks occur which change the effectiveness of capital and/or labor. Examples are technological innovations, bad weather, imported oil price increases, tougher regulations, etc.