The new classical model of economics emerged in the 1970s, building upon the classical model that preceded the Great Depression. Key figures in its development include Robert Lucas, Thomas Sargent, and Robert Barrow. This model shares significant similarities with classical economics, particularly the belief that the economy operates at potential GDP, indicating full employment and optimal resource utilization.

A defining characteristic of the new classical model is the flexibility of wages and prices. Unlike the Keynesian model, which posits that prices are "sticky" and slow to adjust during economic fluctuations, the new classical perspective asserts that wages and prices can quickly respond to changes in supply and demand. This flexibility is crucial during economic downturns, where rapid adjustments can help stabilize the economy.

Another important concept introduced by the new classical model is rational expectations. This theory suggests that firms and workers form expectations about future economic conditions, particularly inflation, and base their current decisions on these expectations. For instance, if workers anticipate a 2% inflation rate but experience a 10% increase instead, it can lead to significant economic consequences, including shifts in the short-run Phillips curve, which illustrates the relationship between inflation and unemployment.

To mitigate discrepancies between expected and actual inflation, the new classical model advocates for a monetary growth rule. This approach emphasizes a steady increase in the money supply, which helps stabilize expectations about inflation. By adhering to a consistent monetary policy, firms and workers can make more informed predictions about future economic conditions, thereby enhancing overall economic stability.

While the new classical model presents valuable insights, the primary focus of introductory economics courses often remains on the Keynesian model, which emphasizes government intervention during economic recessions and inflationary periods.

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