1. What do Keynesian economists believe about macroeconomic policy?

Keynesians believe the following:

• Wages and prices are not flexible in the short run.
• The economy is not always in equilibrium.
• The government must take an active role in the economy to stabilize aggregate demand.
• The private sector, especially investment, is an important source of shifts in aggregate demand.
• The aggregate supply curve is not horizontal, but slopes upward as real GDP approaches its potential level.

2. What role do monetarists believe the government should play in the economy?

Monetarists believe that the economy is inherently stable and that government intervention in the economy makes business cycles worse. They therefore favor minimal government intervention in the economy.

3. What is new classical economics?

New classical economists emphasize rational expectations and believe that the economy tends toward equilibrium. They also believe that fiscal and monetary policy can change the equilibrium level of real GDP only if the changes are unexpected. Any predictable policy simply affects prices. Government policy should therefore target a low, stable rate of inflation.

4. How do theories of economics change over time?

Economic theories develop in response to new economic situations or perceived failings in old theories. Thus Keynesian theory evolved to explain the Great Depression, and monetarist and new classical economics evolved to explain the problem of simultaneous unemployment and inflation.