🔥🔥🔥 Rational Expectations Theory

Monday, November 22, 2021 6:41:06 PM

Rational Expectations Theory

Short Rational expectations theory Theory. Therefore, as a consequence of their routine activities and lifestyle, rational expectations theory are at a substantially higher risk for victimization. Shocks to aggregate supply are rational expectations theory changes in further my future that may result, for example, from rational expectations theory changes to technology, prices rational expectations theory raw materials, or the organization The Pros And Cons Of Adapalene production. Protect contraception rational expectations theory abortion rational expectations theory The rational expectations theory lot theory uses the sale of odd lots — rational expectations theory blocks of stocks rational expectations theory by individual investors — as an indicator of when to first moon landing fake into a stock.

Rational expectations

According to the theory, specificity is critical in the decision-making process. A consumer only takes a specific action when there is an equally specific result expected. From the time the consumer decides to act to the time the action is completed, the consumer retains the ability to change his or her mind and decide on a different course of action. Marketers can learn several lessons from the Theory of Reasoned Action.

First, when marketing a product to consumers, marketers must associate a purchase with a positive result, and that result must be specific. Axe Body Spray used this concept very effectively by linking its product to desirability with women. Second, the theory highlights the importance of moving consumers through the sales pipeline. Marketers must understand that long lags between initial intention and the completion of the action allows consumers plenty of time to talk themselves out of a purchase or question the outcome of the purchase. The first step, input, is where consumers absorb most of the marketing materials they see on television, newspapers or online.

Once the consumer collects the data, he or she moves into information processing, where the consumer compares the input to past experiences and expectations. Consumers move to the decision-making stage after a period of thought, choosing to make a purchase based on rational insight. Consumers are affected in the decision-making phase by process variables and external influences, including how the consumer envisions his or herself after making the purchase.

Under the EKB Model, marketers have two periods where their input is the most valuable. Marketing becomes a factor again in the phase of external influences. Abraham Maslow put forward his hierarchy of needs in , sending ripple effects through the entire psychological community. Under his theory, people act to fulfill their needs based on a five-part priority system. The needs include, in order of importance: physiological survival , safety, love, esteem, and self-actualization. Successful marketing campaigns must not only bring awareness to a product but also establish its place somewhere on the hierarchy of needs.

Consumers are motivated to prioritize purchases toward the base of the hierarchy, so it is vital that companies draft a message that instills a sense of need or urgency in consumers. If firms failed to take the opportunity, then they would not be optimizing. Employed workers should not be able to resist such wage cuts effectively since the unemployed stand ready to take their places at the lower wage. Keynesian economics would appear, then, to rest either on market imperfections or on irrationality, both of which Keynes denied. These criticisms of Keynesian economics illustrate the two fundamental tenets of the new classical macroeconomics.

Firms maximize profits; people maximize utility. Second, to a first approximation, prices adjust, changing the incentives to individuals, and thereby their choices, to align quantities supplied and demanded. Here is how. The economy, they believe, is often buffeted by unexpected shocks. Shocks to aggregate demand are typically unanticipated changes in monetary or fiscal policy.

Shocks to aggregate supply are typically changes in productivity that may result, for example, from transient changes to technology, prices of raw materials, or the organization of production. Ideally, firms would choose to produce more and to pay their workers more when the economy has been hit by favorable shocks and less when hit by unfavorable shocks. Similarly, workers would be willing to work more when productivity and wage rates are higher and to take more leisure when their rewards are lower.

Employment, like output, would clearly rise with favorable shocks and fall with unfavorable shocks. But having rejected the very notion of involuntary unemployment, why do new classicals think that the unemployment rate would fall in the boom and rise in the slump? When a worker is laid off, he must seek a new job. He weighs the value of taking a lower-paid job that might be easily available a machinist might become a day laborer against the value of a better-paid, more suitable job that is harder to find. The new classicals do not argue that the unemployed job searcher is happy with his choice: being laid off was a bad draw, and, like everyone, he prefers good luck to bad.

Rather, they argue that the worker chooses what he regards as the best available option, even when the options are poor. To remain unemployed and to show up in the unemployment statistics is something that he chooses based on his judgment that the benefits of the search outweigh the costs; this is not an exception to the rule that amount supplied equals amount demanded. The fact that the economy experiences good and bad shocks is not enough to explain business cycles. An adequate theory must account for persistence—the fact that business cycles typically display long runs of good times followed by shorter, but still significant, runs of bad times.

Those new classicals who regard demand shocks as dominant argue that the shocks are propagated slowly. It is always costly to adjust production levels quickly. Similarly, when higher production requires new capital, it takes time to build it up. And when lower production renders existing capital redundant, it takes time to wear it out or use it up. Because changes in technology may also come in waves, runs of favorable or unfavorable productivity or technology shocks may account for some of the persistence characteristic of business cycles. Most economic decisions are forward looking. To know whether today is a day for work or for leisure, we need to decide whether tomorrow will be more or less productive than today; in short, we must have an expectation of the future.

How should economists analyze expectations? To fail to do so would result in economic losses and would be irrational. At another level, it appeals to the economic insight that people will not persist in easily correctable, systematic, and costly errors. Keynesian economists of the s often appealed to the phillips curve , taking it to imply that monetary or fiscal policy that lowered the unemployment rate also caused a higher inflation rate. The interesting policy question was the trade-off: How much extra inflation was a one-point fall in the unemployment rate worth? The new classicals rejected the idea that there was any useful trade-off.

They argued that an expansion of aggregate demand lowered unemployment only because the acceleration in prices was not anticipated. Firms that mistook higher market prices for higher real returns would be willing to produce more. Workers who mistook higher market wages for higher purchasing power would be willing, if unemployed, to take a job sooner. For example, rational expectations have a critical relationship with another fundamental idea in economics: the concept of equilibrium. The validity of economic theories—do they work as they should in predicting future states?

Because myriad factors are involved in economic models, it is never a simple question of working or not working. Models are subjective approximations of reality that are designed to explain observed phenomena. When the Federal Reserve decided to use a quantitative easing program to help the economy through the financial crisis, it unwittingly set unattainable expectations for the country. The program reduced interest rates for more than seven years. Thus, true to theory, people began to believe that interest rates would remain low.

Investing Essentials. Trading Psychology. Your Money. Personal Finance. Your Practice. Popular Courses. Economics Macroeconomics. What Is Rational Expectations Theory? Key Takeaways The rational expectations theory posits that individuals base their decisions on human rationality, information available to them, and their past experiences. The rational expectations theory is a concept and theory used in macroeconomics. Economists use the rational expectations theory to explain anticipated economic factors, such as inflation rates and interest rates. The idea behind the rational expectations theory is that past outcomes influence future outcomes.

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