UGC NTA NET/JRF Exam, June-2025 Economics (Shift-II)

Statement B & D are not true.
The Policy Ineffectiveness Proposition (PIP) is a theory, primarily within new classical economics, suggesting that anticipated monetary policy cannot consistently influence real GDP or employment levels.

This proposition, developed by Robert Lucas, Thomas J. Sargent & Neil Wallace, hinges on the idea of rational expectations, flexbile prices of Wages, and market clearing mechanisms.

Where individiuals accurately anticipate the actions of policymakers & adjust their behavior accordingly.

The operating target of monetary policy conducted by the RBI is the Weighted Average Call Money Rate (WACR).

WACR reflects the average interest rate at which banks borrow and lend overnight funds in the interbank market.

RBI uses tools like repo operations & variable rate reverse repos to steer WACR close to the repo rate.

Statement A: The main protagonist was R.E. Lucas Jr → True
Robert Lucas is considered the key figure in new classical economic.
S→B:- IT is based on adaptive expectation- false- it is based on rational expectations, not adaptive expectations.
S→C:- It was developed during 1950s, → false developed mainly in the 1970s, not 1950s.
S→D:- Complete wage & price flexibility: True→ New classical assumes markets clear quickly because prices and wages are fully flexible.
S→E:- Difference between actual and expected price is a random error → True → with rational expectations, forecast errors are purely random.

In 2016, the RBI Act, 1934 was amended to:
1. Formally adopt a flexible inflation targeting framework.
2. Establish the monetary policy committee (MPC).
Include an explicit mandate to maintain price stability, while keeping in mind the objective of growth.

Amendment Reference: The Finance Act, 2016 inserted section 45Z to define the monetary policy framework, thereby effectively amending the preamble/mandate of the RBI.

The correct match is as follows -