Consider the following statements:
Statement 1: The new classical policy ineffectiveness proposition asserts that, systematic monetary policy and fiscal policy actions that change aggregate demand will not affect output and employment even in short run.
Statement 2: According to Real Business Cycle (RBC) model, the aggregate economic variables are the outcomes of the decisions made by many individual agents acting to maximize their utility subject to production possibilities and resource constraints.
Consider the following statements:
Statement 1: The new classical policy ineffectiveness proposition asserts that, systematic monetary policy and fiscal policy actions that change aggregate demand will not affect output and employment even in short run.
Statement 2: According to Real Business Cycle (RBC) model, the aggregate economic variables are the outcomes of the decisions made by many individual agents acting to maximize their utility subject to production possibilities and resource constraints.
Show Hint
- ONLY Statement 1 is TRUE
- ONLY Statement 2 is TRUE
- BOTH Statements are TRUE
- BOTH Statements are FALSE
The Correct Option is C
Solution and Explanation
Step 1: Understand the policy ineffectiveness proposition.
According to new classical economists (like Robert Lucas), rational expectations mean that systematic policy cannot affect real output in the short run — agents adjust their expectations accordingly.
Step 2: Understand Real Business Cycle (RBC) model.
RBC theory considers real (not monetary) shocks as primary drivers of business cycles and models the economy as a collection of utility-maximizing agents facing constraints.
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