New Classicalism Flashcards
What are the differences between Classicalism and New Classicalism?
Microeconomic theory: marginal analysis, utility maximization, a micro-writ-large perspective.
What are the four points of New Classicalism?
- Rational Expectations
- Lucas Critique
- Involuntary Unemployment doesn’t exist
- Ricardian Equivalence
What is Rational Expectations?
People will learn and change their behavior to anticipate the consequences of someone’s choices. Example: If the gov funds housing, then the private sector will pull out. And there is no net gain.
What is the Policy Ineffectiveness Proposition?
Develops out of Rational Expectations. People adapt to policies and make them less effective.
What is the Lucas Critique?
Relates to models. Societal changes will always be greater than government policy. Equations estimated in models rely on expectations about policy. Changes in policy change expectations, and so models aren’t reliable for predicting results of policies.
Why do New Classicalists not believe in involuntary employment?
People can always find a job if they are willing to accept a lower wage.
What is Ricardian Equivalence?
Debt = future taxes. Due to rational expectations, deficits don’t increase consumption because people save more so their grandchildren can pay their higher taxes.
