new classical macroeconomics theory, rational expectations, Lucas critique , economics optional

new classical macroeconomics theory, rational expectations, Lucas critique, economics optional
• In 1930 unemployment was the major problem in the world Keynes suggest to increase public expenditure to reduce unemployment.
• During Second World War 1939 -1945 inflation was the major problem.
• Post-war late 1960 again unemployment was a major problem.
• From the late 1960 to-70, a new problem arises called stagflation in which both inflation and unemployment are high.
• According to Keynesians or monetarists Changes in aggregate demand due to expansionary monetary policy or expansionary fiscal policy cause a temporary increase in employment and output but in the long-run output and employment return to their natural rate.
• According to a new classical economist systematic monetary and fiscal policy actions that change aggregate demand will not affect output and employment, even in the short run. This has been termed the new classical policy ineffectiveness proposition. The new classical economics developed against the background of the high inflation and unemployment of the 1970s and the accompanying dissatisfaction with the prevailing Keynesian orthodoxy.
THE RATIONAL EXPECTATIONS CONCEPT AND ITS IMPLICATIONS
The theory posits that individuals base their decisions on three primary factors:
1. Their human rationality,
2. The information available to them,
3. Their past experiences.
• Keynesians and monetarists have assumed that price expectations adjust slowly and can be fixed for the analysis of policy effects over short periods. In the Keynesian model, expectations are backwards-looking. The expectation of a variable such as a price level adjusts (slowly) to the past behaviour of the variable.
• New classical economists criticize such formulations. New classical economists propose that economic agents are rational and do not make systematic errors. According to the rational expectations hypothesis, expectations are formed based on all available relevant information concerning the variable being predicted. rational expectations are forward-looking so labour supply will charge according to future expectations.
• Anticipated and unanticipated policy changes have very different effects when expectations are assumed to be rational.
Anticipated policy changes and rational expectation
• In the new classical model, with the assumption of rational expectations, the expected price level depends on money supply (M), government spending (G) and tax collections (T'),
• The increase in the money supply will shift the aggregate demand schedule to the right If the supply schedule did not shift, the output would rise from Yo to Y1 and the price level would increase from Po to P1. With the rise in the price level, the labour demand schedule shifts to the right. If the labour supply schedule did not also shift, employment would rise (from No to N1). As money supply changes are anticipated by labour suppliers labour supply schedule will shift to the left this shift will lead due to a reduction in unemployment and output switch back to their initial level N0, Y0.

[@educationadda2244]

Easily understandable ty sir ☺️ 🙂

[@rekhamuduli3281]

I am jealous of u sir🥰. What a explanation!!!!!!!!

[@marifkhan7054]

but sir monoterist says that in short run monatery policy is effective but in long run it is ineffective. and according to your slide new classical says that it is ineffective both in short run and in long run??

[@MahavidyaeconomicsSchool]

Yes

[@govindsharma4133]

Dont able to clear.

[@nandagholap2628]

Nice lacture

[@MahavidyaeconomicsSchool]

Thanks

[@h75jayadubey31]

Nice explaination ,, sir can't you provide your lecture at less price for those who are economically weak ??

[@ujjwalchhatrapal6862]

😊😊

[@azalfashujaat7364]

Next part available nai a ap k page pa

[@somethingnew5806]

Why demand for labour increse when price increase

[@jagamohansahu1292]

When price inc. producer want to produce more so in order to Inc prodn demand for labour inc

[@azalfashujaat7364]

Sir kindly is chapter ko complete kr dain ....

[@anshumanadhikari9517]

Paisa fek, tamasha dekh😃😃. Woh free mein nhi dega bro

[@rajshankartraders6075]

how can i pay from nepal ?
whats the cost MA economic?

[@lovelythings356]

Sir ba program second semester ka economics padha do

[@MahavidyaeconomicsSchool]

Yes

[@eleven8408]

Whats the cost of upsc optional course?

[@MahavidyaeconomicsSchool]

Please contact 9711855529