New classical analysis of

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New classical analysis of

  1. 1. New Classical Analysis ofOutput and Employment
  2. 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. 3. The effects of an increase in aggregate demand SRAS 2 (expected price level = P3 ) SRAS1 (expected price level = P1) cPrice level P3 (a) Adaptive P2 b expectations P1 a AD2 AD1 O Q1 Q2 National output
  4. 4. The effects of an increase in aggregate demand SRAS LRAS 2 (expected price level = P3 ) SRAS1 (expected price level = P1) cPrice level P3 (a) Adaptive P2 b expectations P1 a AD2 AD1 O Qn Q2 National output
  5. 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. 6. The effects of an increase in aggregate demand SRAS 2 (expected price level = P3 ) SRAS1 (expected price level = P1) cPrice level P3 (b) Rational expectations P1 a AD2 AD1 O Q1 National output
  7. 7. The effects of an increase in aggregate demand SRAS LRAS = SRAS actual 2 (expected price level = P3 ) SRAS1 (expected price level = P1) cPrice level P3 (b) Rational expectations P1 a AD2 AD1 O Qn National output
  8. 8. When expectations New classical analysis are wrong:how an under-prediction of inflation could cause an increase in employment
  9. 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. 10. New classical analysis When expectations are wrong: how a rise in AD could causean increase in national output
  11. 11. How a rise in aggregate demand could cause a rise in national output LRAS SRAS2 (expected price level = P2 ) SRAS1 bPrice level (expected price level = P1) P3 P2 Actual rise in aggregate demand P1 a AD3 AD2 AD1 O Qn Q3 National output
  12. 12. New classical analysis When expectations are wrong:how a rise in AD could cause a fall in national output
  13. 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) P2Price level c P3 Actual rise in aggregate demand P1 a AD2 AD3 AD1 O Q3 Qn National output
  14. 14. New classical analysis How the short-runPhillips curve varies with the accuracy ofinflationary expectations
  15. 15. New classical version of short-run Phillips curves . . . . . . e e e P <P P =P P >PInflation (%) O Unemployment (%)

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