Macro12.13 Essay Example | Topics and Well Written Essays - 1000 words

Macro12.13 - Essay Example There have been more investments and more growth of GDP (Pethokoukis 2012). The rise in OPEC oil prices as a result of fall in supply leads to a fall in demand for oil. The import of oil reduces by the oil importing countries. The prices of goods in the economy rise, and the rise depends upon the economy’s dependence on oil imports. Hence the rate of inflation soars high causing a macroeconomic slowdown (See figure below). The rate at which the economies recover from the recession depends upon the monetary policies adopted by the government. If the money supply curve is more elastic, the government targets to put control upon the interest rate. At lower interest rates the investors would be encouraged to make investments and the economy would recover faster. 3. Adaptive expectation is based on the principle that economic agents build their expectation of any macroeconomic variable, as the inflation rate or price level, as a weighted average of their past observations regarding that variable. Adaptive expectations are used in forecasting figures taking into consideration the interest and inflation rates. In this formation the agents ignore the changes taking place in the monetary and fiscal policies and only base their expectations on the past observations. One of the components of the rational expectation hypothesis, Robert E. Lucas, has emphasized upon the fact that the economic agents exhibit rational behavior by making a forecast of the economic variables taking into consideration the past as well as the present information available. If the government announces an inflation rate and chooses a different rate and increases the money supply, producers would increase output following the increase in prices. In the short run, this would increase output level in the economy, but with rational expectations, the agents would endogenize the discretionary policy of the government, at which point output