Question

[14] A primary conclusion of new classical economics is: A) wages and prices are inflexible downward. B) there is no short run tradeoff between unemployment and inflation. C) a free market economy can operate at less than full employment for long periods of time. D) government intervention in the economy will be rendered ineffective by the responses of businesses and households to these policies.

[15] According to the rational expectations approach, an announcement that interest rates may be raised to curb inflation would likely cause businesses and households to: A) put political pressure on officials to cancel the planned interest rate changes. B) go along with the policy knowing that it is in their best interest to curb inflation. C) immediately borrow and increase their spending to beat the rise in the interest rates. D) reduce borrowing and depend more on the expenditure of saved income and earnings.

Answer 1

14.The primary conclusion of new classical economics
Answer: B) there is no short run trade off between unemployment and inflation.
Reason:The new classical economics came into picture during stagflation( 1970s) when the keynesian economic cures and phillips curve prediction ( trade off between inflation and unemployment ) were severely challenged. In this scenario, the new classical economics argued with the basis of rational expectations that policy makers don't have the capacity to positively affect the economy (by increasing employment at the cost of inflation) exploiting the short run trade off.