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1. New Classical Analysis of
Output and Employment

2. The effects of an increase in aggregate
demand
SRAS1
(expected price level = P1)
Price level
(a) Adaptive
P2 b
expectations
P1
a
AD2
AD1
O Q1 Q2
National output

3. The effects of an increase in aggregate
demand SRAS 2
(expected price level = P3 )
SRAS1
(expected price level = P1)
c
Price level
P3
(a) Adaptive
P2 b
expectations
P1
a
AD2
AD1
O Q1 Q2
National output

4. The effects of an increase in aggregate
demand SRAS
LRAS
2
(expected price level = P3 )
SRAS1
(expected price level = P1)
c
Price level
P3
(a) Adaptive
P2 b
expectations
P1
a
AD2
AD1
O Qn Q2
National output

5. The effects of an increase in aggregate
demand
SRAS1
(expected price level = P1)
Price level
(b) Rational
expectations
P1
a
AD2
AD1
O Q1
National output

6. The effects of an increase in aggregate
demand SRAS 2
(expected price level = P3 )
SRAS1
(expected price level = P1)
c
Price level
P3
(b) Rational
expectations
P1
a
AD2
AD1
O Q1
National output

7. The effects of an increase in aggregate
demand SRAS
LRAS = SRAS
actual
2
(expected price level = P3 )
SRAS1
(expected price level = P1)
c
Price level
P3
(b) Rational
expectations
P1
a
AD2
AD1
O Qn
National output

8. When expectations
New classical analysis
are wrong:
how an under-prediction of inflation
could cause
an increase in employment

9. Effects in the labour market of an underprediction of inflation
ASL1 ((W / P ) = W / P )
e
ASL2 ((W / P )e > W / P )
Real wage rate (W / P)
Underprediction
of inflation
ADL
O Q1 Q2
Number of workers

10. New classical analysis
When expectations
are wrong:
how a rise in AD could cause
an increase in national output

11. How a rise in aggregate demand could cause a rise in national output
LRAS
SRAS2
(expected price level = P2 )
SRAS1
b
Price level
(expected price level = P1)
P3
P2 Actual rise in
aggregate demand
P1
a
AD3
AD2
AD1
O Qn Q3
National output

12. New classical analysis
When expectations
are wrong:
how a rise in AD could cause
a fall in national output

13. How a rise in aggregate demand could cause a fall in national output
SRAS2
LRAS (expected price level = P2 )
SRAS1
(expected price level = P1)
P2
Price level
c
P3
Actual rise in
aggregate demand
P1
a
AD2
AD3
AD1
O Q3 Qn
National output

14. New classical analysis
How the short-run
Phillips curve varies with
the accuracy of
inflationary expectations

15. New classical version of short-run
Phillips curves
. . . . . .
e e e
P <P P =P P >P
Inflation (%)
O
Unemployment (%)