The rational expectations theory suggests that firms and workers are rational thinkers and can evaluate all the consequences of a government policy decision, thereby neutralizing its intended impact. keynesian economics advocates the use of direct government intervention to achieve economic growth and stability. keynesians believe the use of active fiscal policy, using government spending and taxation, is necessary to stabilize the business cycle. monetarist theory suggests that the economy is inherently stable, with its own self-adjusting mechanism that automatically moves the economy to a stable path of growth. monetarists argue against the use of active monetary or fiscal policy and believe the central bank should simply expand the money supply at a rate equal to the economys long-term growth rate. supply-side economics suggests that to foster an environment of prosperity, the market should be left alone and government intervention should be minimal, only occurring through changes in tax rates. this theory maintains that lower government spending and lower taxes provide the stimulus for economic expansion.
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