Mainstream and new classical views are compatible perspectives on macroeconomic issues and policies. Do you agree? Explain.

Question

What will be an ideal response?

Answer 1

It would be difficult to argue that these theories are compatible. One could list several major ways in which they are incompatible: (1) mainstream economists believe the economy is inherently unstable while new classical economists view it as being inherently stable over the long run; (2) monetarists believe any instability is caused by inappropriate monetary policy; (3) mainstream economists support the use of monetary and fiscal policy as tools for achieving and maintaining full-employment, price stability, and economic growth; new classical economists believe that fiscal policy is weak and ineffective and discretionary monetary policy too difficult to manage; (4) mainstream economists view the velocity of money as unstable while monetarists believe it is stable; (5) mainstream economists believe that cost-push inflation is possible while new classical economists believe that inflation is not possible in the long run unless there is excessive money supply growth; and (6) mainstream economists contend that wages and prices are inflexible downward while monetarists believe that prices and wages are flexible.
Having given the sources of incompatibility, it is also possible to say that these theories are not totally incompatible. Most economists agree that both are inherently plausible. In both theories, monetary policy affects the economy in the same direction—the disagreement is over the way it happens and the extent to which the economy is affected. Both sides agree that crowding out can occur, and that the way in which deficits are financed will affect their impact. Both camps evaluate the status of aggregate demand and aggregate supply in their analyses.