Discussion Questions on New Classical Macroeconomics

1. It looks as if the labor market does not "clear" -- that is, that many workers who would be happy to work for less than the going wage are unable to find work. Moreover, it is obvious that there are many labor contracts that apparently prevent wages from adjusting to changing economic conditions. Yet Lucas and Sergent maintain nevertheless on pages 11 and 12 that the labor market is always in equilibrium. How can they?

2. In times of massive unemployment, such as today, what policies would Lucas and Sergent favor?

3. Why, according to Lucas and Sergent, did Keynesian policies fail so spectacularly in the 1970s?

4. Suppose that with inflation running at nearly 20% (as it was in 1980), the Federal Reserve announces that it is going to stop increasing the money supply and, if necessary, decrease the money supply so as to bring inflation immediately down to zero. What, according to the new classical theorists should be the effect? What according to monetarists, should be the effect? What, according to Keynesians, should be the effect?

5. What, according to real business cycle theorists is the driving force behind business cycles?