In 1970's, new macroeconomics school {new classical macroeconomics} (NCM) {new classical economics} built macroeconomic models from individual and company microeconomic behavior, in opposition to Keynesian macroeconomics.
history
Robert Lucas, Jr., Finn E. Kydland, and Edward C. Prescott developed New-Classical models {Real Business Cycles}, based on John Muth's ideas.
assumptions
NCM assumes that behavior maximizes utility and uses rational expectations and that markets can reach equilibrium through free exchange of prices and wages {market clearing}.
model
New classical economics can use representative-agent models. Agents, such as average consumer or producer, always optimize and have rational expectations. If productivity changes, business has cycles. Agent does not work if productivity and wages decline, waiting until they rise again, so government intervention does not work, since agents have full information.
Consumers or producers {representative agent} optimize. Agent optimizations determine economy demand or supply curves. Composition fallacy and Sonnenschein-Mantel-Debreu theorem of Kirman [1992] critically examine representative-agent models.
6-Economics-Macroeconomics-Theories
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Date Modified: 2022.0225