Question

New Keynesian theorists argue that a. price and wage adjustments in response to policy changes often overcompensate and cause further price disruptions. b. unions and big business have considerable power and often choose not to change wages and prices so as to deliberately offset policy changes enacted by the government. c. the Fed and the Congress rarely do what they say they will do, so one should never listen to what they say. d. new classical rational expectations theories about how expectations are formed are completely wrong. e. prices and wages may not be free to adjust in response to policy changes.\

Answer 1

The correct answer is (D)

Step-by-step explanation:

New classical "rational expectations" theories about how expectations are formed, are completely wrong. That is, prices and wages may not be free to adjust in response to policy changes.

This is the basis of New Keynesian economics, which emerged from the Classical Keynesian economics.

New Keynesian theorists argue that wages and prices are sticky (hardly adjust) in the face of short term fluctuations in the economy. This means or explains that short term federal monetary policies do not have such a great influence on wage level and price level in the macroeconomy.