Updating Older Schools of Thought – Paper Scrap

Neo-Classical Economics

Neo-Classical Economics is a form macroeconomic thought that was based on incorporation of rational expectation theory in the through 60s and 70s. This means that the macro economy is made of many individuals who make the best decisions that they possibly can and will drive the economy. This economic model is highlighted by a type of monetarism that considers the demand management system by any type of government is absolutely ineffective even in the short run, and this makes people and support tax cuts. The theory suggests that participants in this economic model will try their best to reach highest utility possible while firms produce and maximize their profits. Firms will produce until marginal revenue will be equal to marginal cost. Neo-Classical economic theory will view all markets perfectly competitive.

 

New Keynesian Economics

New Keynesian Economics is an economic theory that takes in consideration the Micro foundations that Lucas found to be so important when trying to illustrate the Macro economy. This included the acceptance of rational expectations assumptions, which means that people will act only in the most beneficial way that makes since to them while knowing most of the information that is attainable to them. The theory also accepts that firms will not participate in perfect competition but will participate in monopolistic competition. In markets, New Keynesians believe that wages and prices will be “sticky”: market failures and involuntary unemployment is potentially possible while the government intervention attempts to keep the economy in equilibrium.