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Chapter 26: Problem 3

Would it make sense to argue that rational expectations economics is an extreme version of neoclassical economics? Explain.

Short Answer

Expert verified
It would not be accurate to describe rational expectations economics as an extreme version of neoclassical economics. While both theories share some similarities and rational expectations economics expands on some aspects of neoclassical economics, they also differ in their specific assumptions and focus on different aspects of economic decision-making and policy. Rational expectations economics places a heavier emphasis on expectations and anticipations of future events, whereas neoclassical economics focuses more on the role of supply and demand in driving economic activity.

Step by step solution

01

Definition of Rational Expectations Economics

Rational expectations economics is an economic theory that suggests individuals make economic decisions based on all available information and their expectations for the future. It assumes that people form expectations rationally, meaning they have access to relevant data, have a correct understanding of the economic model, and update their expectations as they gain new information.
02

Definition of Neoclassical Economics

Neoclassical economics is a broader economic theory focused on supply and demand as the primary drivers of economic activity. It assumes that individuals and firms seek to maximize utility and profit, respectively, by making rational decisions based on available information. Neoclassical economics also tends to emphasize the benefits of free markets, competition, and limited government intervention in the economy.
03

Key Aspects of Rational Expectations Economics

Some key aspects of rational expectations economics include: 1. The assumption that individuals make rational decisions based on all available information and their expectations for the future. 2. The belief that economic systems are generally in a state of equilibrium, or constantly moving towards equilibrium. 3. The fact that policy changes are usually anticipated by rational economic actors, which can limit the effectiveness of government policies in influencing the economy.
04

Key Aspects of Neoclassical Economics

Some key aspects of neoclassical economics include: 1. A focus on supply and demand as the primary drivers of economic activity. 2. The belief that individuals and firms seek to maximize utility and profit by making rational decisions based on available information. 3. The notion that free markets, competition, and limited government intervention can lead to increased efficiency and economic growth.
05

Comparing Rational Expectations and Neoclassical Economics

While both rational expectations economics and neoclassical economics assume that individuals make rational decisions based on available information, rational expectations economics places a heavier emphasis on the expectations and anticipations of future events in influencing economic decision-making. Additionally, rational expectations economics tends to emphasize the importance of equilibrium and the limited effectiveness of government policies, whereas neoclassical economics focuses more on the role of supply and demand in driving economic activity.
06

Are Rational Expectations Extreme Neoclassical Economics?

It could be argued that rational expectations economics is an extension of neoclassical economics, as both theories emphasize the role of rational decision-making, supply and demand, and market equilibrium. However, rational expectations economics is not necessarily an extreme version of neoclassical economics. While it does expand on some key aspects of neoclassical economics, the two theories differ in their specific assumptions and focus on different aspects of economic decision-making and policy.

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Most popular questions from this chapter

Economists from all theoretical persuasions criticized the American Recovery and Reinvestment Act. The "Stimulus Package" was arguably a Keynesian measure so why would a Keynesian economist be critical of it? Why would neoclassical economists be critical?

Legislation proposes that the government should use macroeconomic policy to achieve an unemployment rate of zero percent, by increasing aggregate demand for as much and as long as necessary to accomplish this goal. From a neoclassical perspective, how will this policy affect output and the price level in the short nun and in the long run? Sketch an aggregate demand/aggregate supply diagram to illustrate your answer. Hint: revisit Figure 26.4

Explain why the neoclassical economists believe that the government does not need to do much about unemployment. Do you agree or disagree? Explain.

When the economy is experiencing a recession, why would a neoclassical economist be unlikely to argue for aggressive policy to stimulate aggregate demand and return the economy to full employment? Explain your answer.

What is the shape of the neoclassical long-run Phillips curve? What assumptions do economists make that lead to this shape?
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