Abstract
This chapter discusses the non-Walrasian prices and perfect foresight. Perfect foresight assumption, whether on prices, quantities, or government actions, does not imply at all that economic policies have no impact on activity. The chapter presents a very simple non-Walrasian equilibrium model where all errors in expectations are excluded, assuming perfect foresight in both prices and quantities. In this model, it turns out that economic policies have no effect on activity if the economy is at the Walrasian equilibrium but such is not the case if non-Walrasian equilibria are considered. The effectiveness of each policy depends on the regime that the economy is in, and it is seen that the traditional Keynesian results are valid only in some regimes. The model deals explicitly with two periods. In each of these periods, there is a market for output and a market for labor. There are three agents in the economy: (1) a household, (2) a firm, and (3) the government.
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