Rational Expectations: Implications for Policy

Running Head : New Classical Macroeconomic Model

New Classical Macroeconomic Model

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New Classical Macroeconomic Model

The new classical macroeconomics model was originated in the early 1970 's by the economists working in the University of Chicago and the University of Minnesota . Robert Lucas , Thomas sergeant , Edward Prescott and Neil Wallace are the economists who were behind the formulation of this macroeconomic model . New classical Macroeconomics model opposes John Maynard Keynes- Keynesian macroeconomics and it develops its analysis on a completely neoclassical framework . It

focuses on rigorous foundations , where macro economic model is built in a similarity to the actions of individual agents , behaviors of whom are modeled by micro economics

New classical models have several assumptions such as

All agents are assumed to possess rational expectations and also are perceived to infinitely lived

The macro economy is perceived to have unique equilibrium at potential output or full employment at any one time and the equilibrium is assumed to come into existence every time via wage adjustment or price

New classical economics has developed the use of representative agent models that has recently faced tremendous neoclassical criticism . Real Business cycles is the most famous new classical model which has been created by Robert Lucas , Edward C . Prescott and Finn E . Kydland

Considering the Keynes 's approach , the classics analyzed the price system as efficiently and effectively enabling the mutual adjustment of supply and demand in a free economy in all markets including the labor market...