... the labour market, nd = xd - x1 (w - p)= xd + x1 (p - w) ns = xs + x2 (w - pe) Assuming equilibrium in the labour market, we solve for the market-clearing nominal wage (w*). so because demand equals the supply, so we get, xd + x1(p - w*) = xs + x2(w* - pe), then we can get w*, after substituting w* into demand function, we get n=n*+(x1x2/x1+x2)[p-pe], where n*=xd-x1(xd-xs/x1+x2) which is also the level of employment when expectations are correct, the nature level of employment, then adding time subscripts, and assume a simply production, Setting aggregate supply equal to aggregate demand and we can get the equilibrium price level : where,is the aggregate excess demand shock, new classical economists assumed that agents have rational expectations. After running the conditional expectations operator Et-1 through the equation, we can get the final solution for output represented as: ...

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