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== Background ==
New classical economics made its first attempt to model aggregate supply in Lucas and [[Leonard Rapping]] (1969).<ref>{{Cite journal | jstor = 1808963|title=Price Expectations and the Phillips Curve|author1=Robert E. Lucas, Jr.|author2= Leonard A. Rapping|journal=The American Economic Review|volume=59|number= 3|date=June 1969|pages= 342–350}}</ref> In this earlier model, supply (specifically labor supply) is a direct function of real wages: more work will be done when real wages are high and less when they are low. Under this model, unemployment is "voluntary".<ref name="SnowdonVane233">Snowdon and Vane (2005), 233.</ref> In 1972 Lucas made a second attempt at modelling aggregate supply.<ref name="SnowdonVane233" /> This attempt drew from [[Milton Friedman]]'s [[natural rate hypothesis]] that challenged the Phillips curve.<ref name="SnowdonVane453">Snowdon and Vane (2003), 453.</ref> Lucas supported his original, theoretical paper that outlined the surprise based supply curve with an empirical paper that demonstrated that countries with a history of stable price levels exhibit larger effects in response to monetary policy than countries where prices have been volatile.<ref name="SnowdonVane453" />
On the basis of Lucas' 1973 paper,<ref>{{cite journal|last1=Lucas|first1=Robert|title=Some international evidence on output-inflation tradeoffs|journal=American Economic Review|date=1973|volume=63|issue=3|pages=326–334}}</ref> [[Thomas Sargent]] and [[Neil Wallace]] introduced their 'surprise' supply function in which there was a white noise error term introduced that cannot be predicted in any way.<ref>{{cite journal|last1=Sargent|first1=Tom|last2=Wallace|first2=Neil|title=Rational" expectations, the optimal monetary instrument, and the optimal money supply rule|journal=Journal of Political Economy|date=1975|volume=83|issue=2|pages=241–254|doi=10.1086/260321}}</ref> Lucas introduced the effects of nominal and real shocks affecting a macro-economy into his system through price expectations: if expectations are true, output in any given period is at its natural level. However, the well-known and widely accepted aggregate production function described by Sargent and Wallace also provides leeway for the white-noise shocks independent of price expectations–resulting in the accidental nature of equilibrium and in the inefficacy of countercyclical efforts of monetary policy.<ref>{{cite book |last=Galbács |first=Peter |title=The Theory of New Classical Macroeconomics. A Positive Critique |___location=Heidelberg/New York/Dordrecht/London |publisher=Springer |year=2015 |isbn= 978-3-319-17578-2 |doi=10.1007/978-3-319-17578-2 |series=Contributions to Economics }}</ref>
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