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Other Papers on :Microeconomics

S/E/17. The Rational Expectations Theory & the Misperceptions Model of the Business Cycle

(2003, 1500 words)

The misperceptions model of the business cycle suggests that unpredictable movements in variables that affect aggregate demand cause movements in aggregate output in the same direction, whereas predictable movements do not. This essay will draw on the Lucas 'Island' model to demonstrate why imperfect information allows unpredictable shocks to fool rational suppliers into altering output. To do this, the analysis will compare and contrast changes in aggregate and relative prices.



 
   
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