Macroeconomic policy is about controlling the economy in the sense of keeping it close to the constant inflation equilibrium. Read the following statement and answer the accompanying questions: 'when thinking of controlling a classroom full of children, one would probably think it wise to base classroom rules on the actual behaviour of children rather than on how they would behave if they solved a forward-looking problem'.

(a) Does the line of reasoning in the statement have any implications for the RBC and NK DSGE models? [Hint: think about the assumptions behind the models].

(b) Are there any insights from the microeconomic literature on behavioural economics that would suggest that the RBC and NK DSGE models place too much weight on agents solving complicated problems forward over distant time horizons? [Hint: a useful starting point is the work of Nobel Prize winners Daniel Kahnemann and Amos Tversky].