How do the new Keynesian and real business cycle models differ on ...

[frankwu]

How do the new Keynesian and real business cycle models differ on the ability of inflationary expectations to affect output?
 
  What will be an ideal response?

Question 2

________ is among the ingredients of a first-rate financial system.
 
  A) Government-directed credit to key economic sectors
  B) Greater efficiency of state-owned banks
  C) Legal reform to strengthen financial contracts
  D) Saving rates of 20 or more

[durant1234]

Answer to Question 1

Both models recognize the influence of expectations on aggregate demand and, thus, on inflation. Both models imply that expected high inflation is a self-fulfilling prophecy, which is likely to have a negative effect on output. In the new Keynesian model, an upward shift of the short-run aggregate supply curve causes output to fall below potential output. In the real business cycle framework, high inflation distorts incentives and disrupts capital markets, causing a decrease in (potential) output.

Answer to Question 2

C