Keynesians	Classical: Real Business Cycle model	Classical: misperceptions model
Assumptions	Wages / prices rigid	Wages / prices flexible	Wages / prices flexible
Main source of shocks	Demand shocks (to less extend supply shocks)	Mainly supply shocks; possibly real demand shock (changes in G)	Monetary shocks are also possible; if unexpected
Model	Demand does not have to be equal to potential output	Demand is equal to potential output	Similar “graph” to keynesians; but the underlying model is differnet; also adjustment to equilibrium is faster Supply:
Labor market	Disequilibrium (rigid nominal wages; efficiency wage theory)	Clears (but frictional unemployment bigger in recessions)	Clears
Policy advice: Should govt. try to smooth business cycles?	Yes	No (will make workers poorer)	No
Fit the facts?	Pro-cyclical employment: yes Pro-cyclical wages: no Pro-cyclical labor productivity: no Non-neutrality of money: yes Inflation tends to be higher during booms: yes Involuntary unemployment during recessions: yes	Pro-cyclical employment: yes Pro-cyclical wages: yes Pro-cyclical labor productivity: yes Non-neutrality of money: no Inflation higher during booms: no Involuntary unemployment during recessions: yes - frictional	Non-neutrality of money: yes Inflation tends to be higher during booms: yes

Y

P

FE

AD

AS

P

Y

AD

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