With regard to the effectiveness of stabilization policies,the new classical macroeconomists conclude that
A) the price level is fixed, so government stabilization efforts are unnecessary.
B) only unexpected changes in the price level will induce changes in national output.
C) traditional demand-based stabilization policies work effectively if the money supply is fixed.
D) firms and individuals do not formulate expectations rationally, so government must step in.
E) money wage adjustments lag behind nominal adjustments, requiring the Fed to expand credit.

Question

Quizplus · Accepted Answer

New classical macroeconomists believe that individuals and firms behave rationally and systematically adjust their expectations based on available information. Therefore, anticipated changes in government policy will not affect national output. However, unexpected changes in the price level can induce changes in output. Therefore, stabilization policies can be effective only if they are unexpected or surprise policies.

With Regard to the Effectiveness of Stabilization Policies,the New Classical