A key element of the new classical model of the business cycle is
A) sticky prices.
B) rational expectations.
C) a horizontal SAS curve.
D) random fluctuations in technology.

Question

Quizplus · Accepted Answer

The new classical model emphasizes rational expectations, in which individuals and firms adjust their behavior based on their expectations of future economic conditions. This is in contrast to the traditional Keynesian model, which assumes that prices and wages are sticky and that individuals have limited information and cognitive abilities. The new classical model also assumes a vertical SAS curve, suggesting that changes in aggregate demand will only affect the price level, not real output. However, the new classical model does not emphasize random fluctuations in technology as a key element of the business cycle.

A Key Element of the New Classical Model of the Business