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Between rational expectations hypothesis, new classical approach, and policy...

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sj83 | (Level 1) Valedictorian

Posted September 23, 2013 at 12:39 AM via web

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Between rational expectations hypothesis, new classical approach, and policy irrelevance proposition, which theory could be argued as better? Why?

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Kay Morse | College Teacher | (Level 1) Senior Educator

Posted September 23, 2013 at 9:08 PM (Answer #1)

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The policy irrelevance proposition relates to the immediacy of setting wage and price levels in response to economic changes. It states that when government sets secret economic policy based on information that is mutually known in the public (government) and private (industry) sectors, then the government policy will have the effect of producing only random variations to economic conditions, in other words, no stable continuous economic change. It further states that when government acts on information known to government but not known in the private sector, then the result will be identical with what industry would have done if they had known the information too. thus, whichever case is considered, government policy is materially irrelevant to either short-term or long-term economic conditions.


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