Question

Question 2

1. Contrast “New-Classical ” and “New Keynesian” models on the relationship of money and output in the short run.

2. Appraise the following statement,

1. “Both new Keynesian and new classical economists recommend against using the stabilisation policy to reduce output fluctuations”.
2. “Monetary policies may not able to fine tune the economy due to long and variable lags”.

Answer 1

Both the new classical and new keynesian keynes have contrast views in many respects-----:

* According to new classical model, economic output is primarily determined by aggregate supply, not aggregate demand.,but as per new keynesian model,Aggregate demand determines the economic output.

* New classical theorists assume perfect competition in the market while new keynesian theory is based on real world situations ,i.e imperfect competion.

* New classical assumes aggregate supply curve to be vertical in shape i.e fixed because of full employment level while new keynesian, state that aggregate supply curve is upward sloping curve.

*New classical theory is based on the assumption of market clearing models where demand and supply forces quickly adjust as prices and wages are flexible. While ,as per keynes ,both prices and wages are sticky and there is involuntary unemployment in the economy.

* As per new classical model, there is self adjusting full equilibrium level in the labour market but as per keynes ,in the short run ,there is unemployment equilibrium in labour market.

# b (1)------It is the fact that both new classical and new keynesian economists are against using the stabilisation policy to reduce output fluctuations.

The new classical theorists recommand that it is the monetary rules and systematic monetary policy which helps to prevent the fluctuations in AD and AS in the economy.they are against the implementation of discretionary monetory policy.

Similarly ,as per new keynesian model,active monetory and fiscal policies are the only solutions to control fluctuations in output ,income and employment.

b(11)--------Monetory policy helps to stabilise the economy through controlling money supply but it may not prove fruitful .The implementation of monetary policy does not guarantee results due to long and variable lags. The reason behind,the policy tools take time to respond when implemented. Usually ,tje results appear in a long time span ,say ,15-20 years.Initially ,its results are not positive .Secondly, people mey choose to do the opposite of what the monetory tools anticipate,No doubt the tools are effective but there is variation in the implemting heads...