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Åêîíîì³÷íà òåîð³ÿ
Marynenko N. Iu.
Ternopil Ivan Pul’uj State Technical University
Some aspects of the rational-expectations macroeconomics
Rational expectations – expectations that are unbiased and based upon
the best available information. According to the rational-expectations theory high unemployment and recession occur because
people are lack of the information necessary to make the work and employment
choices necessary to bring the economy to produce up to its potential. Rational expectations say prices would be halved if people were well informed.
However, if the event was unexpected, it may take time for them to discover
what has happened. People looking for work, for example, may be slow to reduce their wage demands and so will
be unemployed by their own choosing.
So, until wages drop, a recession occurs.
The central ideas of
rational-expectations macroeconomics are illustrated by the following example. Suppose that the government wants to stimulate the economy and does so by increasing the money supply by 10 percent. The first time the government does this, it works. However, it
works by fooling workers and other suppliers into
accepting lower real wages. Now suppose the government does the same thing again ten times in a row. By the tenth time, people will
have caught on and will raise their wages and prices. Then the 10 percent increase in the money supply will no longer
work: it will increase prices, not
output. The logic of this example leads rational-expectations theorists to
reject any theory that states that people can be systematically fooled time after time [1, p. 244].
The
rational-expectations theory can be explained by the following assumptions.
1. People will try to make good forecasts. Businesses need to forecast how well
their goods will be sold and at what profit. Workers and consumers need to forecast income and price
levels. They try to make
the best forecasts, as follows:
a) they make unbiased forecasts. Rational-expectations theorists
believe that people will make random errors
instead of systematic errors (i.e., they don't
repeat the same mistake time after time) when estimating inflation, output, and other
economic variables. Any
model that assumes people make systematic errors is rejected;
b) they use the
available information well. For example, if the government is following a certain policy (such as stimulating the
economy before elections), people notice it.
2. People take steps to avoid being fooled. Let’s consider
only workers. In equilibrium, the demand and supply for workers is equal. Now suppose the
government increases the
money supply unexpectedly. Money wages will rise and workers will initially assume that this represents an
increase in their real wages. So they'll work more, and output and employment will go up. However,
they have been fooled: when prices go up, the
workers will find that only their nominal wages have increased. They have
confused a real shock (an unanticipated
event that changes real wages or real output) with a nominal shock (an unanticipated event that changes all prices and
costs equally, ultimately leaving
real wages and real output unchanged in the long-run). Workers will take
steps to avoid this happening again. They will demand cost-of-living
adjustments in their wage contracts. They will become more aware of government policy and inflation. The next
time the money supply is increased,
real output won't be affected.
Some texts say that the
rational-expectations theory assumes flexible prices
and wages. This is not quite correct. The rational-expectations theory assumes
that prices and wages will become more flexible if the government keeps trying to fool suppliers and workers into
increasing output and employment. Being fooled is costly. However, having
flexible wages and prices is also costly.
People balance these two costs: when the government tries to fool people more often, people will in turn pay the costs of becoming
more flexible.
The results of all of the said
above are the following:
1. Anticipated shifts in the aggregate demand
(AD) curve have no real effects. If workers
know what the government is going to do, they will set their wage contracts so that they are fully employed. In rational-expectations theory, people expect the economy to be at full employment and the price level to be where
the AD curve intersects the full-employment level of
output (on the long-run aggregate supply curve). Anticipated shifts in AD will not affect output or relative prices. Only
the level of prices and costs will change. The
government cannot stimulate output by increasing AD in any anticipated or predictable manner.
2. Only unanticipated shifts in the AD curve affect real output.The
remarkable conclusion of rational-expectations theory is that shifts in AD affect output only when they trick workers
and suppliers into increasing output and
employment. For example, an unanticipated increase in aggregate demand increases output only because the
aggregate supply curve does not shift
up with it.
3. Frequent and
unexpected policy changes harm the economy. If the government
tries to stimulate the economy in any predictable manner (such as when
unemployment rises), its policy will become ineffective. On the other hand, if
it tries to continually surprise the economy, it may affect output but in negative ways.
An example of how frequent policy
changes can harm the economy is that workers, to cope with the greater
uncertainty produced by the policy changes, will demand higher real wages.
Also, savers will demand a higher real
interest rate. As a result, employment and investment will contract, reducing output and growth.
Consequently, it is impossible for the
government to fool people systematically into increasing output. The effects of
continued changes in government policy will be to dull the economy's responses to real changes and to increase uncertainty.
Literature
1. Walter J. Wessels. Economics. – 3rd ed. // Barron’s Educational Series, Inc., USA, 2000. – 593 p.