Exogenous expectations are
not explained within the model
but are simply taken as given.
Extrapolative expectations
assume that the future is an
extension of the recent past.
With rational expectations,
people guess the future
correctly on average.
New Classical
Macroeconomics is based on
the twin principles of rapid
market clearing and rational
expectations.
Gradualist monetarists believe
that full employment is restored
within a few years, so the main
effect of higher money is simply
higher prices.
Moderate Keynesians believe
that the economy will eventually
return to full employment, but
that wage and price adjustment
is fairly sluggish so the process
could take many years.
Extreme Keynesians not only
insist that markets fail to clear in
the short run: they also believe
that markets do not clear in the
long run.
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