Respond to the following prompts in a post with a minimum of 200 words.
How long does it take for wages and prices to adjust, and for the economy to rebound back to its potential GDP? This subject is highly contentious. Keynesian economists argue that if the adjustment from recession to potential GDP takes a very long time, then neoclassical theory may be more hypothetical than practical. In response to those immortal words of John Maynard Keynes, “In the long run we are all dead,” (implying it is impractical to wait for the economy to fix itself) neoclassical economists would say that even if the adjustment takes as long as ten years, the neoclassical perspective remains of central importance in understanding the economy. One subset of neoclassical economists holds that the adjustment of wages and prices in the macroeconomy might be quite rapid indeed. The theory of rational expectations holds that people form the most accurate possible expectations about the future that they can, using all information available to them.
In an economy where most people have rational expectations, economic adjustments may happen very quickly. Do you think markets can be rational when humans aren’t?
Useful Documentary.
Mind over Money
. In the aftermath of the worst financial crisis since the Great Depression, NOVA presents “Mind over Money”—an entertaining and penetrating exploration of why mainstream economists failed to predict the crash of 2008 and why we so often make irrational financial decisions. The program reveals how our emotions interfere with our decision-making and explores controversial new arguments about the world of finance. In the face of the recent crash, can a new science that aims to incorporate human psychology into finance—behavioral economics—help us make better financial decisions?
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