People do not make systematic errors

On average the economy will be close to the LAS curve

Policy makers have better information about the economy than other economic actors

Macroeconomic policy changes must come as a surprise in order to have an impact on the real economy

Higher price levels distort price signals

Higher rates of inflation are associated with higher variability in nominal prices

Unanticipated inflation leads to redistribution of wealth from lenders to borrowers

The loss of value of money in inflation leads to real costs when households engage in efforts to economize on their cash holdings

Friedman Critique

Phelps’ Doctrine

Lucas Model

Taylor Rule

this matters for the choice of using either fiscal or monetary policy to respond to the economic shock

supply shocks demand contractionary aggregate demand policy but expansionary monetary policy

partisan business cycles are generated by supply shocks and real business cycles are generated by demand shocks

in the face of a supply shock aggregate demand policy will not be particularly useful since it will either compound the impact on inflation or unemployment of a supply shock

real business cycle theor

impulse propagation mechanism

deterministic AS-AD system

political business cycles