“Natural rate of unemployment” – An equilibrium level of output and a following level of unemployment determined by the supply of factors of production, technology, and institutions of the economy. Changes in aggregate demand mainly caused by changes in the supply of money causes temporary movements of the economy away from the natural rate. The monetarist policy implications is that attempts to lower unemployment below its natural rate will only be successful in the short run. Over the long term, these policies will be inflationary.10. Rational Expectations Hypothesis – Neo-classicalist economists believe that agents form rational expectations and that they make systematic forecast errors. Expectations are formed on the basis of all available information concerning the variable being predicted. Individuals then use the available information to understand how variables relate to each other. The central tenant of new classical economics is that the stabilization of real variables such as output and employment cannot be achieved by aggregate demand management. The values of real variables in both the short and long term are insensitive to systemic aggregate demand management policies. (Policy Ineffectiveness Postulate) In relation to the labor supply, individuals will account for any expected policy actions and they understand how these aggregate demand policies affect the price level. As a result, anticipated and unanticipated policy changes can have very different effects, like unanticipated changes having short run ramifications. Neo-classical economists believe that output & employment are unaffected by systematic and predictable changes in monetary and fiscal policy. In conclusion, neo-classical economists do not believe that there is any meaningful role for macroeconomic stabilization policy. ...
