Why are aggregate demand shocks not a good explanation of business cycles in the New Keynesian model?

Question

Quizplus · Accepted Answer

In the New Keynesian model, prices are assumed to be sticky in the short run, meaning they do not adjust immediately to changes in aggregate demand. Thus, in response to a positive aggregate demand shock, prices will increase slowly over time, leading to a procyclical response of prices. However, empirical evidence suggests that prices are actually countercyclical, meaning they tend to fall during recessions. Therefore, aggregate demand shocks alone cannot fully explain business cycles in the New Keynesian model.

Why Are Aggregate Demand Shocks Not a Good Explanation of Business