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

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?

ANSWER

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.