多恩布什《宏观经济学》第十版英文原版i21revised

CHAPTER21ADVANCEDTOPICSCHAPTEROUTLINETHERATIONALEXPECTATIONSAPPROACHPERFECTFORESIGHTTHELUCASSUPPLYMODELIMPERFECTINFORMATIONPOLICYIRRELEVANCETHERANDOMWALKOFGDPREALBUSINESSCYCLETHEORYTHEPROPAGATIONMECHANISMPRODUCTIVITYSHOCKSNEWKEYNESIANMODELSOFPRICESTICKINESSMENUCOSTSCHANGESFROMTHEPREVIOUSEDITIONTHEMATERIALINTHISCHAPTERHASBEENKEPTBASICALLYINTACTBUTSOMEFIGURESHAVEBEENUPDATEDTWONEWEQUATIONSHAVEBEENINSERTEDINTHEDERIVATIONOFTHEREALBUSINESSCYCLEMODELINSECTION215ANDALLOTHEREQUATIONSHAVEBEENRENUMBEREDACCORDINGLYINTRODUCTIONOFTHEMATERIALCHAPTER21BEGINSWITHABRIEFOVERVIEWOFFOURMODERNMACROECONOMICTHEORIESRATIONALEXPECTATIONS,THERANDOMWALKOFGDPTHEORY,THEREALBUSINESSCYCLETHEORY,ANDTHENEWKEYNESIANMODELSOFPRICESTICKINESSTHISOVERVIEWISIMPORTANT,SINCEMUCHOFTHEMATERIALTHATFOLLOWSISVERYTECHNICALTHERATIONALEXPECTATIONSAPPROACHASSUMESTHATMARKETSCLEARVERYRAPIDLYANDPEOPLEUSEALLRELEVANTINFORMATIONINFORMINGTHEIREXPECTATIONSANDMAKINGFORECASTSABOUTECONOMICVARIABLESTHISDOESNOTNECESSARILYIMPLYTHATPEOPLEAREALWAYSRIGHTONLYTHATTHEYDONOTCOMMITSYSTEMATICERRORSEVENTHOUGHTHEMODELPREDICTSJUSTASTHECLASSICALMODELDIDTHATFISCALANDMONETARYPOLICIESCANNOTAFFECTTHEEQUILIBRIUMLEVELOFOUTPUTINTHELONGRUN,ITALLOWSFORTRANSITORYDEVIATIONFROMFULLEMPLOYMENTTHERANDOMWALKOFGDPTHEORYARGUESTHATDISTURBANCESINAGGREGATEDEMANDAREFAIRLYUNIMPORTANTBUTSHOCKSTOAGGREGATESUPPLYTENDTOHAVEPERMANENTEFFECTSONGDPACCORDINGTOTHISTHEORY,GDPDOESNOTRETURNTOACLEARLYIDENTIFIABLETRENDAFTERASUPPLYSHOCK,BUTINSTEADFOLLOWSARANDOMWALKTHEREALBUSINESSCYCLETHEORYSIMILARLYARGUESTHATFLUCTUATIONSINGDPARETHERESULTOFREALSHOCKSTOTHESUPPLYSIDEANDTRIESTOEXPLAINTHEPROPAGATIONMECHANISM,THATIS,THEPROCESSBYWHICHTHESESHOCKSARESPREADTHROUGHTHEECONOMYPEOPLEAPPEARTOCAREMOREABOUTTHEIRTOTALLIFETIMESUPPLYOFLABORTHANTHEPARTICULARSOFWHENTHEYWORKTHISIMPLIESTHATLABORSUPPLYISHIGHLYSENSITIVETOTEMPORARYWAGERATECHANGESBUTNOTPERMANENTCHANGESTHENEWKEYNESIANMODELSWEREDEVELOPEDINRESPONSETOTHEASSERTIONSOFTHERATIONALEXPECTATIONSAPPROACHTHESEMODELSARGUETHATEVENIFPEOPLEHAVERATIONALEXPECTATIONS,WAGESANDPRICESSTILLADJUSTONLYSLOWLYDUETOTHEMENUCOSTSOFPRICECHANGESANDTHEEXISTENCEOFWAGECONTRACTSAFTERTHISBRIEFOVERVIEW,CHAPTER21GOESONTODISCUSSTHESEFOURTHEORIESINMOREDETAIL,STARTINGWITHSECTION212,WHICHDEVELOPSTHERATIONALEXPECTATIONSMODELINTHREESTEPSFIRST,AMODELISPRESENTEDINWHICHPRICEEXPECTATIONSAREASSUMEDTOBEEXOGENOUS,IMPLYINGALARGEMULTIPLIERFORMONETARYPOLICYCHANGESTHESECONDMODELASSUMESTHATPEOPLEHAVEPERFECTFORESIGHT,IMPLYINGTHATTHEMONETARYPOLICYMULTIPLIERISZEROTHEFINALMODELASSUMESTHATPEOPLEFORMRATIONALEXPECTATIONSBUTWITHONLYPARTIALINFORMATIONTHISIMPLIESAZEROMULTIPLIERFORANTICIPATEDMONETARYPOLICYCHANGESANDANONZEROMULTIPLIERFORUNANTICIPATEDMONETARYPOLICYCHANGESTHEMODELDERIVESTHEADCURVEFROMTHEQUANTITYTHEORYOFMONEYEQUATION,THATIS,MVPYTHISEQUATIONCANBECHANGEDINTOTHEFORMMVPYWHERETHELOWERCASELETTERSARETHELOGARITHMSOFTHESEVARIABLESTHEEQUATIONCANBETHUSBEINTERPRETEDAS“THECHANGEINMONEYSUPPLYPLUSTHECHANGEINVELOCITYISEQUALTOTHECHANGEINTHEPRICELEVELPLUSTHECHANGEINREALOUTPUT“THESHORTRUNAGGREGATESUPPLYCURVEEMPHASIZESPRICEEXPECTATIONS,THATIS,PPEYYWITHSOMEMATHEMATICALMANIPULATIONOFTHISMODEL,WECANCONCLUDETHATECONOMICAGENTSMAKEPREDICTIONSFORTHEECONOMYTHATAREINCONSISTENTWITHTHEPREDICTIONSTHATTHEMODELITSELFMAKESTHISARGUMENTISKNOWNASTHELUCASCRITIQUEONTHEOTHERHAND,IFWEASSUMEPERFECTFORESIGHT,THATIS,PEP,WECANSHOWTHATMONETARYPOLICYISNEUTRALANDDOESNOTAFFECTREALOUTPUT,EVENINTHESHORTRUNBYINTRODUCINGANERRORTERMTHATISEQUALTOTHEDIFFERENCEBETWEENACTUALANDEXPECTEDMONEYSUPPLYGROWTH,THATIS,MMME,WECANSHOWTHATANTICIPATEDMONETARYPOLICYCHANGESHAVENOREALEFFECTONOUTPUT,WHILEUNANTICIPATEDCHANGESHAVESIGNIFICANTEFFECTSROBERTLUCASASSUMEDTHATECONOMICAGENTSFORECASTTHEPRICELEVELUSINGIMPERFECTINFORMATIONTHESEAGENTSDONTKNOWWHETHERAPRICECHANGEISDUETOACHANGEINTHEOVERALLPRICELEVELORAMARKETSPECIFICDEMANDASARESULT,PRICECHANGESAREATTRIBUTEDPARTIALLYTOBOTHTHERANDOMWALKOFGDPTHEORYASSERTSTHATMACROECONOMICFLUCTUATIONSAREDOMINATEDBYSUPPLYSHOCKS,WHICHHAVEPERMANENTEFFECTSAGGREGATEDEMANDFLUCTUATIONS,ONTHEOTHERHAND,ARELESSIMPORTANTANDHAVEONLYTRANSITORYEFFECTSITALSOARGUESTHATTHEMETHODUSEDTOMODELTHETRENDPATHOFGDPHASSIGNIFICANTIMPLICATIONSWHENIDENTIFYINGSHOCKSTOTHEECONOMYASSUMETHETRENDLINEISDEFINEDASYTTITFOLLOWSTHATYTYT1TT1YTYT1YTANOUTPUTSHOCKUTCANBEINTRODUCEDINTWODIFFERENTWAYSFIRST,ITCANBEADDEDTOTHEINITIALEQUATION,INWHICHCASEYTTUTYTUTUT1IFITISADDEDLATER,HOWEVER,THEFOLLOWINGEQUATIONRESULTSYTYT1UTYTTUTUT1UT2U0THEFIRSTCASEIMPLIESTHATASHOCKSEFFECTISONLYTRANSITORY,LASTINGONLYONEPERIODTHESECONDCASEIMPLIESTHATTHEEFFECTOFASHOCKISPERMANENT,ACCUMULATINGOVERTIMEWHILETHEVIEWTHATSUPPLYSHOCKSHAVELONGLASTINGEFFECTSONTHEECONOMYISNOWGENERALLYACCEPTED,THEVIEWTHATAGGREGATEDEMANDSHOCKSAREUNIMPORTANTISHIGHLYCONTROVERSIALSOMEECONOMISTSARGUETHATANOCCASIONALLARGEANDPERMANENTSUPPLYSHOCKOCCURS,BUTTHATDEMANDFLUCTUATIONSDOMINATEINBETWEENSUCHSUPPLYSHOCKSTHEREALBUSINESSCYCLETHEORYARGUESTHATFLUCTUATIONSINOUTPUTARETHERESULTOFREALSHOCKSHITTINGTHEECONOMYPRODUCTIVITYCHANGESORUNANTICIPATEDCHANGESINGOVERNMENTSPENDING,FOREXAMPLE,WHICHARETHENPROPAGATEDTOOTHERMARKETSTHEMODELRELIESONMICROFOUNDATIONSANDASSUMESTHATMARKETSADJUSTRAPIDLYANDREMAININEQUILIBRIUM,ASCONSUMERSANDPRODUCERSMAKEOPTIMALDECISIONSTHEINTERTEMPORALSUBSTITUTIONOFLEISUREMECHANISMASSUMESTHATTHEREISAHIGHELASTICITYOFLABORSUPPLYINRESPONSETOTEMPORARYWAGERATECHANGESHOWEVER,THISDOESNOTNECESSARILYIMPLYTHATPERMANENTWAGERATECHANGESWILLHAVEASIGNIFICANTIMPACTONTHEAMOUNTOFLABORSUPPLIEDWHILEPEOPLEMAYCHOOSETOWORKMOREINAPERIODWHENWAGESHAVEINCREASEDTEMPORARILY,THEYWILLGENERALLYMAINTAINARELATIVELYSTABLENUMBEROFWORKHOURSINTHELONGRUNINOTHERWORDS,INTHOSEPERIODSWHEREWAGESARETEMPORARILYLOWER,THEYMAYCHOOSETOSUBSTITUTELEISUREFORWORKIFTHEEFFECTOFTHEINTERTEMPORALSUBSTITUTIONOFLEISUREISVERYSTRONG,EVENASMALLPRODUCTIVITYCHANGECANHAVEALARGEEFFECTONOUTPUTTHEREALBUSINESSCYCLEMODELSARECOMPLEXANDCANOFTENONLYBESOLVEDWITHTHEHELPOFCOMPUTERSIMULATIONSECONOMISTSADHERINGTOTHEREALBUSINESSCYCLETHEORYBELIEVETHATTHEPARAMETERSUSEDINTHEMODELSSHOULDBEIDENTIFIEDFROMMICROECONOMICSTUDIESANDSHOULDDESCRIBECONSUMERSANDWORKERSPREFERENCESANDFIRMSPRODUCTIONFUNCTIONSADEQUATELYTHENEWKEYNESIANMODELSTRYTOEXPLAINHOWINDIVIDUALRATIONALDECISIONMAKINGUNDERIMPERFECTCOMPETITIONLEADSTOSOCIALLYUNDESIRABLEOUTCOMES,COMBININGTRADITIONALKEYNESIANMACROECONOMICSWITHMICROECONOMICFOUNDATIONSITISASSUMEDTHATDECISIONMAKERSHAVERATIONALEXPECTATIONSBUTTHATINSTITUTIONALARRANGEMENTSINTHELABORMARKETDECREASETHEFLEXIBILITYOFWAGESANDPRICESWAGESAREGENERALLYSETBYCONTRACTFORAPERIODOFTIMESIMILARLY,MICROECONOMICTHEORYPREDICTSTHATFIRMSINANIMPERFECTLYCOMPETITIVEMARKETARERELUCTANTTOCHANGEPRICESSINCEDOINGSOCOULDAFFECTTHEIRMARKETSHAREORPROFITSFIRMSHESITATETOCHANGETHEIRPRICESSINCETHEPRIVATEBENEFITSOFDOINGSOAREMUCHSMALLERTHANTHESOCIALBENEFITSANDAREOFTENBELOWTHEMENUCOSTOFTHEADJUSTMENTTHENEWKEYNESIANSTHEREFOREINTEGRATETHERATIONALEXPECTATIONSAPPROACHINTHEIRMODELSBUTSTILLGETRESULTSTHATREFLECTTHOSEOFTHETRADITIONALADASANALYSISINOTHERWORDS,WEOBSERVEANUPWARDSLOPINGSHORTRUNASCURVE,WHICHSHIFTSOVERTIMEASWAGECONTRACTSARERENEGOTIATEDANDPRICESAREADJUSTEDWHILEALLOFTHESETHEORIESHAVESOMEAPPEAL,MOREEMPIRICALEVIDENCETOSUPPORTTHEMSTILLHASTOBEGATHEREDTHEREHASBEENAPARTIALCONVERGENCEOFTHESETHEORIESANDTHEYSHOULDNOTBESEENASMUTUALLYEXCLUSIVESUGGESTIONSFORLECTURINGTHISCHAPTERCONTAINSFAIRLYADVANCEDMATERIALANDSOMESTUDENTSMAYBENEITHERABLETONORINTERESTEDINSIFTINGTHROUGHALLTHETHEORETICALARGUMENTSPRESENTEDHEREBUTSTUDENTSSHOULDHAVEENOUGHBACKGROUNDINMICROECONOMICSTOKNOWTHATMARKETSMAYNOTALWAYSCLEARRAPIDLYINAWORLDTHATHASINSTITUTIONALLABORMARKETCONSTRAINTSANDIMPERFECTCOMPETITION,ESPECIALLYWHENTHEREISIMPERFECTINFORMATIONTHEREFOREITSHOULDMAKESENSETOTHEMTHATEVENTHEASSUMPTIONOFRATIONALEXPECTATIONSMAYNOTENSUREIMMEDIATEMARKETCLEARINGBEFOREPRESENTINGTHEMATERIALOFTHISCHAPTERINMOREDETAIL,INSTRUCTORSMYWANTTOPOSETHEFOLLOWINGQUESTIONSDOESITSEEMREASONABLETOASSUMETHATMARKETSALWAYSCLEARRAPIDLYHOWEASILYDOWAGESANDPRICESADJUSTHOWPERSUASIVEARETHEIDEASOFPERFECTFORESIGHT,RATIONALEXPECTATIONS,ORTHELUCASMODELHOWLARGEANDLONGLASTINGARETHEEFFECTSOFDEMANDSIDEDISTURBANCESONTHEECONOMYDOSUPPLYSHOCKSAFFECTTHEGROWTHRATEOFPOTENTIALGDPCANSTABILIZATIONPOLICYALWAYSBESUCCESSFULINKEEPINGTHEECONOMYCLOSETOFULLEMPLOYMENTWHILESTUDENTSMAYHAVEOPINIONSONTHESEISSUES,MOSTWILLNOTBEABLETOSORTOUTTHETHEORETICALARGUMENTSMADEBYTHEDIFFERENTSCHOOLSOFTHOUGHTPRESENTEDINTHISCHAPTERTHEREFORE,THEYNEEDTOBEAWARETHATONEOFTHEMOSTIMPORTANTQUESTIONSINTHEDEBATEOVERWHICHTHEORYAPPEARSTOBEMOSTREASONABLEISHOWWELLTHESEDIFFERENTTHEORIESHOLDUPEMPIRICALLYINMOSTCASES,STUDENTSWILLNOTHAVETHEBACKGROUNDINECONOMETRICSTOUNDERSTANDTHEEMPIRICALPAPERSLISTEDINTHEFOOTNOTESOFTHETEXT,SOITISUPTOTHEINSTRUCTORTOSHOWHOWTHEEMPIRICALEVIDENCESHOULDBEASSESSEDSINCEMUCHOFTHEMATERIALINTHISCHAPTERMAYBEDIFFICULTTOCOMPREHEND,INSTRUCTORSHAVETOWEIGHCAREFULLYHOWMUCHOFITTHEYWANTTOCOVERSECTION211PROVIDESAMUCHNEEDEDOVERVIEWFORANINITIALDISCUSSIONOFTHEDIFFERENTAPPROACHESANDSHOULDDEFINITELYBECOVEREDTHEOTHERSECTIONSAREMORETECHNICALANDMAYCONTAINMOREDETAILONTHEDIFFERENTAPPROACHESTHANINSTRUCTORSFEELISAPPROPRIATEFORTHEIRCLASSESONECOMPROMISECOULDBETOFOREGOANYOFTHEMATHEMATICALDERIVATIONSANDSIMPLYEXPLAINTHEDIFFERENTTHEORIESUSINGTHEOVERVIEWANDEXPANDINGONTHEMOSTIMPORTANTCONCEPTSBYREFERRINGSELECTIVELYTOSOMEOFTHEMATERIALINTHEFOLLOWINGSECTIONSSTUDENTSSHOULDDEFINITELYKNOWTHEDIFFERENCEBETWEENADAPTIVEANDRATIONALEXPECTATIONSANDTHEIMPLICATIONSOFPERFECTFORESIGHTVERSUSRATIONALEXPECTATIONSTHESEDIFFERENCESANDTHEIRIMPLICATIONSFORMONETARYPOLICYCANBESHOWNGRAPHICALLYWITHTHEHELPOFANADASDIAGRAM,INWHICHTHEASCURVESHIFTSWHENEVERPRICEEXPECTATIONSCHANGEIFPEOPLEHAVEADAPTIVEEXPECTATIONS,THEADCURVESHIFTSFIRST,FOLLOWEDBYANEVENTUALASCURVESHIFTTHATWILLRESTOREALONGRUNEQUILIBRIUMATTHEFULLEMPLOYMENTLEVELOFOUTPUTIFPEOPLEHAVEPERFECTFORESIGHT,HOWEVER,THEADANDASCURVESWILLSHIFTSIMULTANEOUSLYTOIMMEDIATELYREACHANEWLONGRUNEQUILIBRIUMATTHEFULLEMPLOYMENTLEVELOFOUTPUTIFPEOPLEHAVERATIONALEXPECTATIONSWEHAVESOMETHINGINBETWEEN,ANDTHELENGTHOFTHEADJUSTMENTPROCESSDEPENDSONHOWFASTMARKETSAREABLETOCLEARONEMISCONCEPTIONTHATSTUDENTSOFTENHAVEISTHATPEOPLEALWAYSMAKECORRECTFORECASTSIFTHEYHAVERATIONALEXPECTATIONSTHEREFOREITISIMPORTANTTOPOINTOUTTHATWHILEPEOPLEUSEALLINFORMATIONAVAILABLETOTHEM,THEYARESTILLPRONETOMAKINGERRORS,ALTHOUGHNOTSYSTEMATICONESTHEREARETWOSIMPLEWAYSTOMAKETHISCLEARTOSTUDENTSONEWAYISTOSAYTHATPEOPLEWHOHAVEADAPTIVEEXPECTATIONSREALIZEONLYSLOWLYTHATTHEYAREWRONGWHENTHEYADJUST,THEYMAYMAKETHINGSWORSERATHERTHANBETTERPEOPLEWITHRATIONALEXPECTATIONSREALIZEMORERAPIDLYTHATTHEYHAVEMADEAMISTAKEANDIMMEDIATELYTRYTOREMEDYTHESITUATION,WHICHTHENIMPROVESTHEOUTCOMEHOWEVER,DUETOMARKETIMPERFECTIONSANDINSTITUTIONALARRANGEMENTS,THEYCANNOTADJUSTIMMEDIATELY,SOMARKETSCANNOTCLEARINSTANTANEOUSLYANOTHERSIMPLEWAYTOEXPLAINTHEDIFFERENCEBETWEENADAPTIVEANDRATIONALEXPECTATIONSISASFOLLOWSWORKERSWITHADAPTIVEEXPECTATIONSTRYTOMAKEUPFORLOSTPURCHASINGPOWERBYNEGOTIATINGWAGESBASEDONTHEPASTINFLATIONRATETHISBEHAVIORMAYLEADTOLAYOFFSANDTHUSDEVIATIONSFROMTHEFULLEMPLOYMENTLEVELOFOUTPUT,SINCELABORWILLBECOMETOOEXPENSIVEONTHEOTHERHAND,WORKERSWITHRATIONALEXPECTATIONSBASETHEIRWAGENEGOTIATIONSONTHEEXPECTEDRATEOFINFLATION,REGARDLESSOFWHATHASHAPPENEDINTHEPASTTHUS,ANEWLONGRUNEQUILIBRIUMISREACHEDMUCHFASTERUNDERRATIONALEXPECTATIONSTHANUNDERADAPTIVEEXPECTATIONSTHERATIONALEXPECTATIONSAPPROACHISTHEORETICALLYVERYAPPEALING,BUTITHASNOTFAREDVERYWELLINEMPIRICALTESTINGNEVERTHELESS,ITHASBECOMEANIMPORTANTPARTOFMACROECONOMICS,PRIMARILYBECAUSEITPROVIDEDTHEBASISFORTHEMICROECONOMICFOUNDATIONSAPPROACHTOMACROECONOMICTHEORYINADDITION,ECONOMISTSFINDITVERYAPPEALINGTOASSUMETHATINDIVIDUALSANDFIRMSUSEALLAVAILABLEINFORMATIONEFFICIENTLYBEFOREMAKINGDECISIONSANDTHATPRICEEXPECTATIONSHAVEASTRONGINFLUENCEONTHEDECISIONMAKINGPROCESSOFECONOMICAGENTSTHERANDOMWALKOFGDPTHEORYCANALSOBEREPRESENTEDGRAPHICALLYBYANADASMODELIFTHEREISADEMANDSIDEDISTURBANCEANDTHEADCURVESHIFTS,THEECONOMYADJUSTSBACKTOTHEORIGINALLEVELOFFULLEMPLOYMENTOUTPUTYIFTHEREISAPRODUCTIVITYSHOCK,THESHORTANDLONGRUNASCURVESSHIFTANDTHEECONOMYEVENTUALLYADJUSTSTOADIFFERENTLEVELOFFULLEMPLOYMENTOUTPUTHOWEVER,SINCETHEADASFRAMEWORKALLOWSONLYFORASTATICANALYSIS,GRAPHS214AND215SHOULDALSOBEUSEDTOSHOWHOWTHETRENDOFGDPCANCHANGEOVERTIMESTUDENTSSHOULDBEAWARETHATTHEREALBUSINESSCYCLETHEORYISANOUTGROWTHOFTHEFIRSTTWOTHEORIESDISCUSSEDHERETHISTHEORYASSERTSTHATFLUCTUATIONSINOUTPUTARETHERESULTOFREALSHOCKSHITTINGONESECTOROFTHEECONOMY,WHICHARETHENPROPAGATEDTOOTHERSECTORSMARKETSADJUSTRAPIDLYANDQUICKLYREACHANEQUILIBRIUMSTUDENTSMAYHAVESOMEDIFFICULTYUNDERSTANDINGTHECONCEPTOFINTERTEMPORALSUBSTITUTIONOFLEISUREANDMAYNOTREALIZETHATTHEYTHEMSELVESPRACTICETHISBEHAVIORINTHEIRDAILYLIVESFOREXAMPLE,ASSUMEASTUDENTWHOHASFIGUREDOUTHOWMANYHOURSOFSTUDYOVERTHENEXTTHREEWEEKSWILLEARNHERABINHERMACROECONOMICSFINALANDSTILLLEAVEENOUGHTIMEFORHERTOATTENDTHREEPARTIESBEFORETHEENDOFTHESEMESTERIF,AMONGALLTHEPARTIESONCAMPUS,THETHREEBESTPARTIESWEREEQUALLYDISTRIBUTEDOVERTHENEXTTHREEWEEKSSHEWOULDPROBABLYATTENDONEOFTHESEEACHWEEKWITHOUTCHANGINGHERSTUDYHABITSBUTIFALLTHREEOFTHESEPARTIESOCCURREDINTHETHIRDWEEK,SHEWOULDPROBABLYSTUDYMUCHHARDERINTHEFIRSTTWOWEEKS,SOSHECOULDMASTERTHEMATERIALANDSTILLATTENDATLEASTTWO,IFNOTALLTHREE,OFTHEMOSTDESIRABLEPARTIESINTHETHIRDWEEKSTUDENTSPROBABLYFINDMOSTCONVINCINGTHEMODELSOFTHENEWKEYNESIANSTHATTRYTOEXPLAINPRICESTICKINESSWITHMICROFOUNDATIONSTHEYHAVEHADACOURSEINMICROECONOMICSANDAREFAMILIARWITHTHEBEHAVIOROFFIRMSINANIMPERFECTLYCOMPETITIVEMARKETTHEYKNOWTHATWAGESTENDTOBEFIXEDBYCONTRACTANDCANNOTBEEASILYCHANGEDTHEREFORE,THEYDONOTBELIEVEINANIMMEDIATEWAGEANDPRICEADJUSTMENTPRICESTICKINESS,WHICHISTHEBASISOFTHENEWKEYNESIANAPPROACH,MAKESINTUITIVESENSETOTHEMITSHOULDBEPOINTEDOUTTHATTHISAPPROACHWASDEVELOPEDINRESPONSETOTHERATIONALEXPECTATIONSTHEORYITARGUESTHATEVENUNDERTHEASSUMPTIONOFRATIONALEXPECTATIONS,MARKETSWILLNOTADJUSTIMMEDIATELYBECAUSEOFLABORCONTRACTS,IMPERFECTMARKETS,ANDADJUSTMENTCOSTSSTUDENTSALSOLIKETHISAPPROACHSINCEITALLOWSTHEMTOCONTINUETOUSETHEFAMILIARADASFRAMEWORKINSTRUCTORSSHOULDTHEREFOREPOINTOUTTHATNOTEVERYONEAGREESWITHMANKIWSAPPROACHASDISCUSSEDINSECTION216THEREAREOTHERQUESTIONSWITHWHICHSTUDENTSSTILLMAYSTRUGGLEFOREXAMPLEWHATPOLICIESAREMOSTSUCCESSFULINALLOWINGMARKETSTOWORKMORESMOOTHLYCANFISCALORMONETARYSTABILIZATIONPOLICYBEUSEDSUCCESSFULLYTOCOUNTERMACROECONOMICDISTURBANCESTHEANSWERSTOTHESEQUESTIONSCLEARLYDEPENDONHOWMUCHWEIGHTONEGIVESTOTHEASSERTIONSMADEBYTHEDIFFERENTTHEORIESDISCUSSEDINTHISCHAPTERINTEGRATINGTHEDIFFERENTVIEWSINTHISCHAPTERINTOAFRAMEWORKTHATISUNDERSTANDABLETOSTUDENTSSUCHASTHEADASMODELISIMPORTANTBUTITISEVENMOREIMPORTANTTOENABLESTUDENTSTOJUDGEWHICHASSUMPTIONSAREMOSTREALISTICITISUSEFULINTHISREGARDTOSPENDSOMETIMEASKINGSTUDENTSWHICHOFTHEVARIOUSAPPROACHESINTHISCHAPTERMAKEMOSTSENSETOTHEMANDFORWHATREASONSTHISSHOULDINITIATESOMEGOODDISCUSSIONANDMAYPROVIDETHEOPPORTUNITYTOEXPLAINCERTAINKEYASPECTSINMOREDETAILORTOCORRECTSOMEMISCONCEPTIONSINTHESTUDENTSUNDERSTANDINGOFTHEVARIOUSTHEORIESFINALLY,INSTRUCTORSSHOULDPOINTOUTONEMORETIMEWHATWASSAIDATTHEVERYBEGINNINGOFTHECOURSE,NAMELYTHATECONOMICTHEORIESCONSTANTLYEVOLVEASOURUNDERSTANDINGOFHOWTHEECONOMYWORKSIMPROVESTHETHEORIESHIGHLIGHTEDINTHISCHAPTERWILLUNDOUBTEDLYBEREPLACEDBYOTHERTHEORIES,ORATLEASTAMENDEDINWAYSTHATCANEXPLAINTHEEVENTSTHATOCCURATINTHEFUTUREADDITIONALREADINGSAIYAGARI,RAO,“ONTHECONTRIBUTIONOFTECHNOLOGYSTOCKSTOBUSINESSCYCLES,”QUARTERLYREVIEW,FRBOFMINNEAPOLIS,WINTER,1994AKERLOF,GEORGE,“BEHAVIORMACROECONOMICSANDMACROECONOMICBEHAVIOR,”AMERICANECONOMICREVIEW,JUNE,2002ALTONGI,JOSEPH,“INTERTEMPORALSUBSTITUTIONINLABORSUPPLYEVIDENCEFROMMICRODATA,”JOURNALOFPOLITICALECONOMY,JUNE,1986BARRO,ROBERT,“UNANTICIPATEDMONEY,OUTPUT,ANDTHEPRICELEVELINTHEUNITEDSTATES,”JOURNALOFPOLITICALECONOMY,MARCH,1978BLANCHARD,OANDFISCHER,S,LECTURESONMACROECONOMICS,MITPRESS,CAMBRIDGE,MA,1989FOX,JUSTIN,“WHATINTHEWORLDHAPPENEDTOECONOMICS”FORTUNE,MARCH15,1999FRIEDMAN,MILTON,“THEROLEOFMONETARYPOLICY,”AMERICANECONOMICREVIEW,MARCH,1968HUH,CANDTREHAN,B,“REALBUSINESSCYCLESASELECTIVESURVEY,”ECONOMICREVIEW,FRBOFSANFRANCISCO,SPRING,1991KING,ROBERT,“QUANTITATIVETHEORYANDECONOMETRICS,”QUARTERLYREVIEW,FRBOFRICHMOND,SUMMER,1995KING,RANDPLOSSER,C“MONEY,CREDITANDPRICESINAREALBUSINESSCYCLEMODEL,”AMERICANECONOMICREVIEW,JUNE,1984LUCAS,ROBERTE,STUDIESINBUSINESSCYCLES,MITPRESS,CAMBRIDGE,MASSACHUSETTS,1983MANKIW,GREGORY,“REALBUSINESSCYCLESANEWKEYNESIANPERSPECTIVE,”JOURNALOFECONOMICPERSPECTIVES,SUMMER,1989MANKIW,GREGORY,“AREOUTPUTFLUCTUATIONSTRANSITORY”QUARTERLYJOURNALOFECONOMICS,NOVEMBER,1987MANKIWGREGORY,“SMALLMENUCOSTSANDLARGEBUSINESSCYCLESAMACROECONOMICMODELOFMONOPOLY,”QUARTERLYJOURNALOFECONOMICS,MAY,1985MISHKIN,FREDERIC,“DOESANTICIPATEDMONETARYPOLICYMATTERANECONOMETRICINVESTIGATION,”JOURNALOFPOLITICALECONOMY,FEBRUARY,1982MULLIGAN,CASEY,“SUBSTITUTIONOVERTIMEANOTHERLOOKATLIFECYCLELABORSUPPLY,”NBERMACROECONOMICSANNUAL,VOL13,1998MUTH,JOHN,“RATIONALEXPECTATIONSANDTHETHEORYOFPRICEMOVEMENTS,”ECONOMETRICA,VOL29,JULY,1961NELSON,CANDPLOSSER,C,“TRENDSANDRANDOMWALKSINMACROECONOMICTIMESERIESSOMEEVIDENCEANDIMPLICATIONS,”JOURNALOFMONETARYECONOMICS,SEPTEMBER,1982PLOSSER,CHARLES,“UNDERSTANDINGREALBUSINESSCYCLES,”JOURNALOFECONOMICPERSPECTIVES,SUMMER,1989ROMER,DAVID,“THENEWKEYNESIANSYNTHESIS,”JOURNALOFECONOMICPERSPECTIVES,WINTER,1993SARGENT,TANDWALLACE,N,“RATIONALEXPECTATIONSANDTHETHEORYOFECONOMICPOLICY,”JOURNALOFMONETARYECONOMICS,APRIL,1976SIMS,CHRISTOPHER,“MACROECONOMICSANDMETHODOLOGY,”JOURNALOFECONOMICPERSPECTIVES,WINTER,1996SUMMER,LAWRENCE,“SOMESKEPTICALOBSERVATIONSONREALBUSINESSCYCLETHEORY,”QUARTERLYREVIEW,FRBOFMINNEAPOLIS,FALL,1986LEARNINGOBJECTIVESSTUDENTSSHOULDBEFAMILIARWITHTHERATIONALEXPECTATIONSAPPROACHANDTHECONCEPTOFPOLICYIRRELEVANCESTUDENTSHOULDBEABLETODISTINGUISHBETWEENPERFECTFORESIGHT,RATIONALEXPECTATIONS,ANDADAPTIVEEXPECTATIONSSTUDENTSSHOULDBEABLETODISTINGUISHBETWEENTHEEFFECTSOFANTICIPATEDANDUNANTICIPATEDCHANGESINMONETARYPOLICYSTUDENTSSHOULDBEABLETOEXPLAINTHERANDOMWALKOFGDPTHEORYANDHOWSUPPLYSIDEDISTURBANCESMAYAFFECTTHEGROWTHTRENDOFPOTENTIALGDPSTUDENTSSHOULDBEABLETOEXPLAINTHEREALBUSINESSCYCLETHEORYANDTHEPROPAGATIONMECHANISMTHATINVOLVESTHEINTERTEMPORALSUBSTITUTIONOFLEISURESTUDENTSSHOULDKNOWTHATTHENEWKEYNESIANMODELSAREBASEDONMICROECONOMICFOUNDATIONS,REFLECTINGRATIONALEXPECTATIONS