Question

5. If most people have rational expectations, how long will recessions last? 6. Explain why the neoclassical economists believe that nothing much needs to be done about unemployment. Do you agree or disagree? Explain?

Answer 1

5)

Under the rational expectations theory, economic agents are apt enough to predict the future based on the available information. When every individual realizes that the economy is facing a recession, the wage and price would go down. Thus, it will drive up the purchasing power of people. Eventually, demand would pick up and recession would automatically disappear. Thus, recession can be dealt with without the intervention of government.

Recession will continue until economic agents realize that recession has hit all and their purchasing powers have increased owing to a fall in prices.

6)

Neoclassical believes that the government should not make an intervention in economic activities to restore employment. Unemployment can be only voluntary, workers might not be ready to work. further, government rules might prevent firms to reduce wage rates and hire more workers.

thus, Neoclassical uses microeconomics tools to explain macroeconomic problems. The government must seek to promote a perfectly competitive market in the economy. it would reduce asymmetric information and conditions would be favorable for employments and there would be an only short spell of unemployment in economy. Market forces would work in the most efficient ways to restore equilibrium in the economy.

Neo classical recommendations can not be accepted fully, financial crisis of 2008 has once again illustrated the importance of government actions in restoring employments.