What´s Macro Policy: The Adaptive Expectations Theory

Expectations is a predicament that a change will occur in the near future. However, in economics the word expectations definition pertains to either the predicament in change for the buyers or the sellers. For example, if a seller expects the price of a good to rise in the future the seller will store more of the good and sell less now and a greater quantity in the future. Similarly, a buyers, as N. Gregory Mankiw an economist points out "expectations about the future may affect their demand for a good or service today" (Principles of Microeconomics pg.71). In fact, Elaine's expectations effect her demand for the birth control sponge. Let us explore to the reason as to why her expectation affects her demand curve as

I) Inflation will ensue rapidly because eventually, the money supply will grow faster than the economy. When there is that much high inflation, people might not “trust” money because it no longer acts as a store of value since it continually loses value, and it is no longer effective as a unit of account since prices increase all the time.

In order to be successful in economic growth it's important to increase money supply and lower the interest rates which is also related to Easy Monetary Policy which is defined by others as the “Accommodative Monetary Policy” followed by

The three primary concerns in macroeconomic analysis that I found played a major role in macroeconomics was gross domestic product, inflation and unemployment. All three of these concerns tie together and affect one another. But first let’s start off with inflation. Inflation is referred to as a broad increase in the price among services and goods within an economy over a certain period of time. Inflation has always been a concern for businessmen, policymakers, and investors. When inflation is expected, it can be planed for. Example being businesses will raise prices, so workers will demand higher wages, and then lenders will raise interest rates. You then have unexpected inflation, which is where inflation is higher than expected and tends

Explain the concept of potential output and why actual output can differ from potential output?

There are two types of economic policies to control aggregate demand in a market economy. These two types are known as fiscal policy and monetary policy. Fiscal policy is when the government changes their taxing amounts and their spending, for the purpose of expanding or contracting aggregate demand. Monetary policy is the changes in interests rates and money supply to expand or contract the same demand, but it is under control of our central bank. When it comes to fiscal policy, the government does two very different things to promote economic growth, depending on what is going on in the economy at a certain time. For example, if our economy is in a recession and is failing, this policy would involve lowering taxes and reducing spending.

Policy is implemented by raising and lowering the interest rate, affecting the demand for goods and services from consumers and businesses alike. There are two types interest rates, real rate of interest and the nominal rate of interest. According to McConnell and Brue, p.146, "The real interest rate is the percentage increase in purchasing power that the borrower pays the lender. The nominal interest rate is the percentage increase in money that the borrower pays the lender, including that resulting from the built-in expectation of inflation, if any." The interest rate affects both consumers and businesses demand for goods and services. The consumers demand is affected by changes in real interest rates. If this rate is increased, it alters the costs of borrowing on credit, banks availability to loan money, household incomes, and foreign exchange rates. If real interest rates are lowered,

The monetary policy is among the most crucial tools the United States central bank can put into use so as to achieve the various economic objectives. The outlook of the US economy should underline the progress that the Fed reserve has initiated towards the mentioned dual mandate which has been put into place by the Fed reserve towards the constant dual mandate goals of employment to the maximum in the price stability context (Steven, 2011). Over the recent times or years, the US economy has progressed towards the outlined goals. However, in the context of the United States monetary policy, the rate of unemployment is still at high levels while the rate of inflation is too low. Due to the uncertainty of the US monetary policy, normalization can be determined since it is data dependent (Axilrod, 2011). Whenever there is a shift in monetary policy, it is crucial to be mindful of the most likely occurrences since they come alongside by certain degrees of market turbulence and stress. Additionally, if the US monetary policy is normalized, some certain challenges will be formed for the economies in the emerging markets (Steven, 2011). It is upon the Federal Reserve therefore to address the risks that come with the US monetary policies.

A substantive academic literature has focused on how monetary policy should be chosen so as to stabilise the economy against unpredictable shocks. A fundamental idea in monetary economics developed by Kydland and Prescott (1977) is the inconsistency of optimal plans and the superiority of economic rules. They argue that discretionary policymaking is based on the current situation, however in a dynamic economic system the decisions of agents also depend on their expectations of future policy actions. Therefore policymakers fail to acknowledge the effect of their policy on the optimal decision of the economic agents when using optimal control theory. This idea is strengthened by Lucas and Sargent (1978) who develop

In the last two decades, the rapid financialization has brought increasingly frequent and widespread economic crisis in the world economy. These crises have originated mostly from the financial markets, then downsizing and recession has emerged in the real economy. The response to the economic crisis in the first place was realized through monetary policy. However, because of a long period of crisis, its affects to many countries and during the crisis the monetary policy implemented does not create the expected impact, central banking and monetary policy has led to the proliferation of criticism. Thus, together with the crisis of the monetary policy implemented by the central bank theoretically has undergone transformation. Occuring transformation very quickly in the field of monetary policy and central banking stems from the fast development of financial markets and economic activity at the national level in many international qualification. Performing of monetary policy has become increasingly difficult in the triangle of inflation, production and finance.

Monetary instability leads to large and unpredictable changes in the money supply whereby central banks attempt to monetize the debt through increasing interest rates which result in higher inflation. Inflation is the logical outcome of an expansion of the money supply in excess of real output growth. It also reflects erosion in the purchasing power of money – a loss of real value in the internal medium of

The second is the expectation of inflation. Federal Reserve Chairman Ben Bernanke explained it this way. Once people expect inflation, they will buy things now to avoid higher future prices.

Expectation theory implies that the yield curve reflects investors’ expectation about the future interest rate and inflation. Higher the future inflation rate, higher the long-term

Inflation is general defined as the devaluation of the currency with the comprehensive and continued rising price level, which means the purchase of money is persistent declining (James and Charles 1975). And this is generally considered as the result of the amount of money in circulation more than the actual needs of the economy. It will directly leads to the devaluation of paper money. If the income of residents do not change, then the living standard of citizens will dropped, which might result in the social and economic disorder and can negatively impact the development of the economy. However, within a certain period of time, moderate inflation can stimulate consumption, expand domestic demand and promote economic development (Trevithick and Mulvey 1996). For example, sometimes the government borrow money from the central bank to expand financial investment and take measures to ensure that the private sector investment is not reduced, which promote economic growth as a result of the increase in total investment. Another case is for producers that the speed of product prize rising is always faster than the that of the nominal wage, so the profit of the enterprise in the short term will increase, and the enterprise will expand investment, as a result, have an positive effect on the economy.

Aggregate wage measures the overall cost of labor, and the index shows the percentage of change in this value over the period examined in this case, there has been an increase of 4.59% in the aggregate wage. The aggregate for each year is calculated by multiplying the rate by the number of staff for each grade (to weight the wages correctly), then summing the results; the index is simply the current year divided by the base year and multiplied by 100. The average rate measures the costs of labor in the amount-per-unit of labor rather than as an overall or total measure, in this case showing a 2.47% increase over the period in question. Average rates for each year are calculated by taking the same sum of rate times number of staff for each grade and dividing by total number of staff; the index is current year/base year * 100.