Expectations in Economics

... Expectations in Economics Expectations play a major role in determining the behaviour of the economy. How agents respond to change in policy determines the size and sometimes the direction of the economy's response to the change. The importance of expectations is an old theme in macroeconomics. Nearly all the economic decisions people and firms make - whether to buy bonds or stocks, whether or not to buy a machine depend on their expectation of future profits, or future interest rates. In real world people form expectations for every activity they do. When it comes to economic activity the agents in the economy also form expectations. These expectations can be in relation to expected rise or decrease in price of any goods or services. Therefore the policy maker's should take into account the expectations of the people. Until 1970, macroeconomists based the formation of expectations on animal spirit and backward looking rules. These

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