Monetarist/New Classical Equilibrium

The monetarist/new classical equilibrium model sees the economy as moving toward a long-run full employment level of output, represented by a vertical long-run aggregate supply (LRAS) curve at potential output. Short-run changes in aggregate demand can move output away from potential, but wage, price and expectation adjustments restore full employment, so demand management mainly affects the price level in the long run. The model implies policy should focus on stable monetary conditions and supply-side flexibility rather than persistent demand stimulus, though this conclusion relies on strong assumptions about flexible markets and information.