When aggregate demand is greater than expected, inventories fall and prices on remaining goods in stock are higher. Businesses hire new workers to increase production to offset the falling inventories. If wage contracts exist, employers must adjust employment to changing conditions. If revenues fall, employers must reduce costs, either by lowering wages or by getting rid of workers. If a wage contract precludes lowering wages, a decrease in inflation will result in unemployment.
Adaptive expectations are expectations based on past experience.
People expect things to be as they were before, and they take nothing else into account. Rational expectations are formed using all available information, including, but not limited to, past events. Some economists believe in the existence of a political business cycle, in which the incumbent administration stimulates the economy just before the election. After the election, unemployment and inflation rise. There is no conclusive evidence of political business cycles in the United States.