Quiz 11: New Classical Economics


According to the rational expectations hypothesis,expectations are formed on the basis of all the available relevant information concerning the variable being predicted.Furthermore,individuals understand how the observed variables will affect the variable they are trying to predict. Rational expectations do not mean that people do not make mistakes; it only means that they do not make predictable mistakes in one direction or another.

The new classical policy ineffectiveness proposition states that systematic monetary and fiscal policy actions that change aggregate demand do not have any effect on output and employment,even in the short run.

If the public has better information,it will be harder for the Federal Reserve to conduct unanticipated monetary policy.As a result,monetary policy should have fewer real effects on the economy and stabilization is less likely to be effective.