During the last Century two major school of economics have been developed, Neoclassical Economics and Keynesiyan Economics.

The New Classical school is the modern adaptation of the classical school .   It is based on rational expectations it believes Rational agents are always making optimal decisions and firms are always maximizing profits, but the economy is often shocked by “real” effects like unanticipated policy changes, changes in technology or changes in raw materials. New Classical economists are generally associated with a laissez faire approach to policy.

In New Keynesiyan Economics Although economic agents are rational we believe policymakers can improve economic stability and help attain full employment through various stabilization policies designed to combat a variety of market failures. Economic agents are rational, but markets are imperfect due to phenomena such as “sticky prices”.  This can result in broad market failures leading to recession. New Keynesians will generally deviate towards the use of Monetary Policy, but will at times also recommend fiscal policy to help stabilize the economy.

Nine Schools of Economic Thought
Nine Schools of Economic Thought

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