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The competitive equilibrium
The competitive general equilibrium tries to give an understanding of the whole economy using a "bottom-up" approach, starting with individual markets and agents, as a microeconomic approach. The rational expectations theory is based off this microeconomic approach, where it assumes that each individual agent is capable of quickly adapting to market changes and solving for the competitive equilibrium. This bottom-up approach and the concept of quick adaptation have been the source of much criticism about the rational expectations theory.
II. Flaws
Application of rational expectation to aggregate behavior
The main idea behind the rational expectations hypothesis is to consistently extend the principle of individual rationality from the problem of the allocation of resources.
The problem is the hypothesis's application to aggregate behavior. Even if all individual agents have rational expectations, the representative corporation/household/industry describing these behavior may not collectively make efficient use of all given information. Hence, in the aggregate, agents may not satisfy rational assumptions, and hence does not have macroeconomic applicability.
The rational expectation accounts only for rationing by price
The rational expectation theory is inapplicable with the law of diminishing...
When demand is low, if an employer is at labor capacity, a lower wage will not lower unemployment rates unless it is sufficiently low to benefit the employer enough to hire an unemployed laborer at the lower rate in the place of an already trained current employee. The monetaristic view takes into account only price, so rational expectation is that if the wages drop unemployment will be benefited, and further if wages drop then price and drop and demand will increase. It does not take into account, hiring freezes, training costs and expertise of current employees.
Rational expectation standard as it relates to fiscal policy
Rational expectation assumes that macro-policy will be of limited use to society because of the hypothesis's primary assumption that agents adapt quickly. The idea is that they will adapt to changes in policy, and will obtain all relevant information to efficiently adjust forecasts in benefit of earning money
. However, more modern models have indicated the positive effects of fiscal policy.
F.H. Hahn, Monetarism and Economic Theory, Economica, New Series, Vol. 47, No. 185. (Feb., 1980), 6.
Hahn, 2.
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Hahn, 6.
Hanh, 11-2.
Hahn, 11-2
Hahn, 5-6.
Under Paul Volcker's chairmanship of the Federal Reserve from 1979-1987, to uphold a philosophy Volcker identified as monetarist, the Fed would try to hit specified monthly targets for the growth rate of the monetary supply, "with operating procedures that emphasized control over a narrow and controllable monetary aggregate, non-borrowed reserves (i.e., bank reserves minus borrowings from the Fed)" (McCallum 2008). After an initial painful period of recession, Volcker's actions had
Disrupting America's economic system is a fundamental objective of terrorists Even as the world continues to struggle with the terrible shock from the September 11 attacks in New York and Washington, one principle lesson has already become clear: disrupting our economic system is a fundamental objective of terrorists. Prior to September 11, our economic environment was certainly not immune to terror, in comparison to many other nations; we lived relatively terror-free. Now,
In the long run, the volatility of money supply will also only cause changes in inflation rate and thus the nominal GDP of the country, as believed by monetarists, as the markets are believed to be always approaching their full employment rate. But with evolution of capital markets and appearance of numerous wealth capitalization methods besides holding M1, the velocity of money became very variable rather than stable and equal
Keynesian economics is an economic theory based on the ideas of John Maynard Keynes (Jackson 29). First published in 1936, Keynes's theory suggests that general trends may overwhelm the micro-level behavior of individuals. He stated," This book is chiefly addressed to my fellow economists ... I myself held with conviction for many years the theories which I now attack, and I am not, I think, ignorant of their strong points"
social policy and economic policy? Social policy refers to guidelines, principles, legislation and activities that concern the way that humans live and interact. According to the Malcolm Wiener Center for Social Policy at Harvard University it refers to "public policy and practice in the areas of health care, human services, criminal justice, inequality, education, and labor."[1] Another way that one can perceive social policy is that it is a cluster of
This also implies inadequacies in fiscal sustainability, which influences investments in private sectors. The second channel happens through the level, composition and quality involved within the public investment, which shows the level at which the public investment replaces the private investments (Schmidt- Hebbel, Serven, & Solimano, 1996). The final channel regards the level of taxation on the corporate earnings and the rules applicable in depreciations. There have been arguments that fiscal policy