Topic 5 - New Classical Macroeconomics

Interactive questions on expectations, Lucas AS equation, and monetary policy rules

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Question 1: Adaptive vs Rational Expectations

Adaptive expectations are backward looking while forward looking behaviour leads naturally to rational expectations. Discuss.

Question 2: Lucas Aggregate Supply and Friedman

In what sense can the Lucas Aggregate Supply Equation be used to explain the short run effects of monetary policy as argued by Milton Friedman? Explain.

Question 3: Monetary Volatility and Output Effects

According to the New Classical model, the more volatile is monetary policy the lower is the effect of unpredictable changes in the price level on output. Intuitively explain why this is the case.

Question 4: Systematic Policy and Technology Shocks

Under what circumstances can a central bank use systematic monetary policy to stabilise the economy when it faces random shocks to productive technology? Explain.