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This 3-page paper focuses on the assumptions and predictions of the new classical model of economics. Also included in this paper are policy implications and analysis pertaining to this theory. Bibliography lists 1 source.
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3 pages (~225 words per page)
File: D0_MTncmeco.rtf
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directly into the types of policies that the government and Federal Reserve should adopt to help provide a stable economy. New Classical Macroeconomics (NCM) is one theory that has been
introduced to discuss connections between policies and the economy. In this paper, well discuss the model itself, as well as assumptions, predictions and policy implications.
The New Classical Model was first introduced in the 1970s, led by Robert Lucas of the University of Chicago, Thomas Sargent of Stanford University and Neil Wallace
of the University of Minnesota (Torz, 2003). These three professors developed a macroeconomic theory based on the three following assumptions.
First, markets are assumed to be cleared (Torz, 2003)."Cleared" is a condition in which input and output prices vary so quantity demanded is equated
with quantity supplied. Second, individuals and firms are assumed to possess imperfect information. And
finally, the assumption is that the expectations of individuals and firms conform to the theory of rational expectations, or RATEX (Torz, 2003).RATEX, in its most basic form, notes that an
individuals or firms expectations/forecast of a particular economic variable is rational, as long as the individual or firm makes the best possible use of the information available (Torz, 2003).When it
comes to RATEX, individuals and firms cant make systematic errors in their expectations or forecasts; meaning on average, if forecasts are rational, theyre correct.
Another factor of NCM is that a high unemployment rate is not necessarily evidence of a gap between actual output and potential output; a gap that can be
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