Both the new classical and new Keynesian business cycle theories agree that
A) the money wage rate is influenced by rational expectations of the price level.
B) unexpected changes in aggregate demand cannot result in a business cycle.
C) the long- term nature of wage contracts allow expected changes in the price level to cause business cycles.
D) expected changes in aggregate demand lead to the business cycle.

Question

Quizplus · Accepted Answer

Both the new classical and new Keynesian theories emphasize the importance of rational expectations in determining the money wage rate, which in turn affects the overall level of prices and the business cycle. Unexpected changes in aggregate demand may still have an impact on the short-term fluctuations of the economy, but they do not explain the long-term patterns of recession and recovery seen in the business cycle. Additionally, the long-term nature of wage contracts is relevant in explaining price stickiness and the persistence of inflation, but it does not necessarily lead to business cycles in and of itself.

Both the New Classical and New Keynesian Business Cycle Theories