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Compare and contrast New Classical and New Keynesian theories of Business cycle
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Compare and contrast New Classical and New Keynesian theories of Business cycle Two schools of thought regarding the role and viability of stabilisation and the function of the labour market influencing policy maker in both public and private sectors. The debate over stabilisation policy is no longer dominated by economists adhering to Classical theory, Keynesian theory, and monetarism. Other schools of thought are also represented, but predominantly the main arguments arise between New Classical macroeconomists (NCM) and New Keynesian macroeconomists(NKM). New classical theory emerged in the 1960's based on three key assumptions: Firstly markets are assumed to be cleared - Input and output prices vary instantaneously so as to equate quantity demanded and quantity supplied. Secondly, individuals and firms are assumed to possess imperfect information. Thirdly, that expectations of individuals and firms conform to theory of rational expectations, individual or firms forecast of a particular economic variable are rational...
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