Briefly explain the \"theory of rational expectations.\" What makes supply-side

Question

1. Briefly explain the "theory of rational expectations."
2. What makes supply-side economics theoretically attractive?
3. What are the four sources of economic growth? Which of the four is regarded as the most important source of economic growth.
4. What is human capital? What do think we can do today to improve human capital in the U.S. in the near future?
5. If growth in labor supply is a source of economic growth, then we should just open our borders and let everyone immigrate to the U.S. Agree or disagree? When it comes to labor what matters for economic growth?

Explanation / Answer

1.The theory of rational expectations was first proposed by John F. Muth of Indiana University in the early 1960s. He used the term to describe the many economic situations in which the outcome depends partly on what people expect to happen. The price of an agricultural commodity, for example, depends on how many acres farmers plant, which in turn depends on the price farmers expect to realize when they harvest and sell their crops. As another example, the value of a currency and its rate of depreciation depend partly on what people expect that rate of depreciation to be. That is because people rush to desert a currency that they expect to lose value, thereby contributing to its loss in value. Similarly, the price of a stock or bond depends partly on what prospective buyers and sellers believe it will be in the future.

2.This can be looked at on an AS/AD graph. If increasing supply (lowering costs) then producers and make more and sell at a lower price. provided that demand stays the same. Because the price is theoretically lower people can buy more so the quantity sold will go up along with quantity that they can produce. Since GDP=C+I+G+X-M Consumer spending (C) will go up and if its a product that is exported then X will go up. If this change is great enough then business confidence will go up which basically means how willing people are to invest in a business. This happens in tax havens such as Lichtenstein. Investments will increase (I) so therefore you can say With Extreme confidence that GDP will increase which is all ways a must for a government to try and do because you don't want your people poorer. Also since the price is lowered then obviously there will be less inflationary pressures. This will mean the reserve bank or in USA the central bank can lower the OCR will will increase Investments because the OCR determines the loan rate that banks loan to people. This will do the opposite to inflationary pressures because demand in the economy will increase because people can afford to invest more. And once again GDP will increase as investments will increase (I). Short story short gdp will increase inflation will be less then OCR decrease causing GDP to increase more causing inflation, and over all GDP increase allot inflation remains the same (ish). But supply side tactics aren't as responsive as demand side tactics (OCR etc) so results might not happen as quickly and there fore its harder to see if it actually works or something affected the economy. But theoretically it should work.

3.Y = I +G+ C+ Nx is a Keynesian equation and consumption model.

It includes injections but hides withdrawals. Strange enough the most influential component is S i.e. savings ( not shown here) in withdrawals. Chinese have proved this because, no one is fool to sit idle upon cash !

4.Impeach the sequestered one who plainly has a wife that insults our flag on National T.V.

5.Immigrants are not voters. Inflow will create unemployment problems despite growth . This will destabilize government. Economist are not SUPPOSED to be worried about unemployment and inflation because they are human problems . I think, they are happiest lot under stagflation because then everybody seeks their recommendations stupidly.

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