Modern Macroeconomics.pdf

The new classical school 271possibility that economic agents will anticipate the effects of changes ineconomic policy does imply that the authorities’ scope to stabilize the economyis reduced. Second, new classical macroeconomics has strengthened the casefor using aggregate supply policies to stimulate output and employment.Lastly, new Keynesians have been forced to respond to the challenge of newclassical macroeconomics and in doing so, in particular explaining why wagesand prices tend to adjust only gradually, have provided a more sound microtheoreticalbase to justify interventionist policies (both demand and supplymanagement policies) to stabilize the economy.Before discussing new Keynesian economics we first examine in the nextchapter the evolution of the Mark II version of new classical economics, thatis, real business cycle theory.