New Classical vs New Keynesian Economics

New Classical Economics

• New classical economics is a modern interpretation of classical economic thought.
• Key figures in new classical economics include Robert Lucas, Thomas Sargent, Robert Barro, and Edward Prescott.
• New classical economists emphasize the use of mathematical techniques in economic analysis.
• New classical economists believe in flexible prices and wages, rational expectations (or perfect foresight), market efficiency, and full employment.
• They argue that economic fluctuations are caused by rational actors responding to incentives, not by rigidities in prices or wages.
• New classical economists strongly support rational expectations and the microeconomic foundations of macroeconomic relationships, such as the consumption and investment functions.
• New classical economists developed the "policy ineffectiveness proposition" which states that countercyclical policies cannot effectively manage economic cycles.

New Keynesian Economics

• New Keynesian economics is a contemporary approach to Keynesian economic theory.
• Major figures in new Keynesian economics include John B. Taylor, Stanley Marolf, and Edmund Phelps.
• New Keynesian economists focus on addressing the shortcomings of traditional Keynesian theories by incorporating elements of microeconomic foundations and rational expectations into their models.
• They acknowledge the existence of nominal rigidities (sticky prices and wages) that can create short-term deviations from market equilibrium.
• New Keynesian economists believe that government intervention, through monetary and fiscal policies, can play a role in stabilizing the economy during periods of economic instability.
• They recognize the challenges of implementing effective policies while considering the potential for unintended consequences and the need for well-designed policies with clear objectives.

This quiz explores the contrasts and connections between New Classical and New Keynesian Economics. Delve into key figures, fundamental principles, and the implications of rational expectations versus market inefficiencies in economic theory. Test your knowledge on how these schools of thought shape modern economic analysis.