Question

eopunents are and how they affect pe ear ve relationship between inflation and the unemployment rate. ch 14, notes) New classical economists argued that anticipated monetary and fiscal policy d no effect on output (policy ineffectiveness postulate) and potentially caused a misallocation of resources in the long run. Explain why they believe these two ideas. ch 1

Answer 1

New Classical economists argued that people are rational and government fiscal and monetary policies are not successful in eliminating disequilibrium in economic system. Economic system is inherently stable and does not require external interventions. People in economy are rational and they accurately predict possible actions of government. They tend to act contrary fiscal and monetary policies, so there are no impacts on output and employments levels. Government can not deliberately affect the output and employment levels in economy. it is called proposition of ineffectiveness.

second, If government uses fiscal and monetary policies, it would unnecessarily lead to the misallocation of resources. resources are transferred from private sector government sector. Since government actions do not produce positive effects on output and employments. So, there is misallocation of resources and it breeds inefficiencies in economic system.