CHAPTER 27 Aggregate Price Level, P Rational Expectations: Implications for Policy LRAS 705 AS2 AS1 P2 P2* 2* P1 AD2 AD1 Y2* (a) Traditional model Yn Aggregate Output, Y Aggregate Price Level, P LRAS AS2 AS1 P2 P2* 2* P1 AD2 (b) New classical macroeconomic model AD1 Y2* Yn Aggregate Output, Y Aggregate Price Level, P LRAS AS2+ AS1 P2 P2* P2+ P1 AS2 2* 2+ AD2 AD1 (c) New Keynesian model Y2* Y2+ Yn Aggregate Output, Y F I G U R E 7- Anti-Inflation Policy in the Three Models With an ongoing inflation in which the economy is moving from point to point 2, the aggregate demand curve is shifting from AD1 to AD2 and the short-run aggregate supply curve from AS1 to AS2.The anti-inflation policy, when implemented, prevents the aggregate demand curve from rising, holding it at AD1 (a) In the traditional model, the economy moves to point 2* whether the anti-inflation policy is anticipated or not (b) In the new classical model, the economy moves to point 2* if the policy is unanticipated and to point if it is anticipated (c) In the new Keynesian model, the economy moves to point 2* if the policy is unanticipated and to point if it is anticipated