How do new classical economists view the importance of policy rules and discretion in macroeconomic policy?

Question

What will be an ideal response?

Answer 1

Monetarists and other new classical economists argue for policy rules to reduce government intervention in the economy that they believe cause macroeconomic instability. In regard to monetary policy, monetarists have proposed a monetary rule that the money supply be increased at the same annual rate as the potential annual rate of increase in the real GDP. A monetary rule would shift aggregate demand rightward to match a shift in the long-run aggregate supply curve that occurs because of economic growth, thus keeping the price level stable over time.
Monetarists and other new classical economists question the value of fiscal policy and some extreme proposals have called for a required balanced federal budget over time. The reason that monetarists and new classical economists dislike fiscal policy is that it will tend to crowd-out investment and only cause a temporary increase in output. RET economists also think that fiscal policy is ineffective and that people will anticipate it and their acts will counteract its intended effects.