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Unformatted text preview: -people have rational expectations-deviations from expectations create volatility in AD 4. New Keynesian-agree that unexpected events more ad-but b/c wages sticky, expected events can also effect AD RBC theory-no Ad/as model in RBC-RBC says business cycles come from changes in productivity Productivity output per unit of input-main inputs are labor + capital-how does productivity of labor change? Labor mkt-recall LD=MPL-and MPL is labor productivity-RBC says MPL is volatile-LD is volatile Capital MKT/loan able funds Market-increase in tech, will create demand for capital, and increase in demand for loan able funds-RBC says demand for capital volatile-all this volatility affects output-so output is more volatile...
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- Fall '06