The new classical model has as its central idea that
A)wage and price stickiness explains fluctuations in real GDP.
B)workers and firms have rational expectations.
C)the Federal Reserve should adopt a monetary growth rule.
D)shifts in aggregate demand have no impact on real GDP.

Question

Quizplus · Accepted Answer

The central idea of the new classical model is that workers and firms have rational expectations, meaning they use all available information to make economic decisions. This rational behavior leads to market clearing and efficient outcomes in the long run. The model also emphasizes the importance of supply-side factors, such as technological progress and labor productivity, in determining real GDP. Wage and price stickiness are not seen as significant determinants of fluctuations in real GDP in the new classical model. The adoption of a monetary growth rule by the Federal Reserve is a specific policy recommendation that some proponents of the new classical model may support, but it is not the central idea of the model. Similarly, the model does not suggest that shifts in aggregate demand have no impact on real GDP, but it does emphasize the role of supply-side factors in determining long-run growth.

The New Classical Model Has as Its Central Idea That