In the New Classical model, when output is above trend, unemployment is countercyclical and employment will be above trend and so be procyclical. Inflation will be procyclical but real wages will be countercyclical because as output rises real wages fall.

Question

Quizplus · Accepted Answer

In the New Classical model, when output is above trend, unemployment is countercyclical because the higher output leads to increased demand for labor, which reduces unemployment. Employment will be above trend and so be procyclical because of the increased demand for labor. Inflation will be procyclical because the higher output leads to increased demand for goods and services, which puts upward pressure on prices. Real wages will be countercyclical because as output rises, the demand for labor increases, which leads to higher wages. However, the higher output also leads to higher prices, which reduces the purchasing power of wages.

In the New Classical Model, When Output Is Above Trend