... limiting case. NCs therefore work within a Walrasian General Equilibrium unlike Monetarists who often preferred a Marshallian partial equilibrium approach. As required by Walrasian equilibrium the Classical Dichotomy is also re-established and Aggregate Supply (AS) is assumed to depend only on relative prices. As we shall see NCs restated even more strongly than monetarists the neutrality and superneutrality of money. Another important feature of the NC school is its adoption of Rational Expectations (RE) first developed by Muth. RE assume that people engage in a cost-benefit analysis of whether it is worth searching for certain forms of information and then make efficient use of the information available to them by understanding how the economy works and continually revising expectations to take into account of any new information. NC theory focuses in particular in the efficient use of information aspect of RE, having little to say on how this information is obtained. Lucas ...

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