Rational Expectation Hypothesis Proposed By Lucas ( 1973 )...

According to rational expectation hypothesis proposed by Lucas (1973) and Sargent (1971), economic participants can make full use of all the information they can get to forecast the future inflation and will not make systematic mistakes. To be specific, inflation expectations lead to a faster pace of currency circulation. As inflation expectations rise, people feel that they will suffer losses due to the weakness of purchase power, and therefore do not want to continue to hold trading and preventive currency. This will speed up the flow of money, resulting in more money is created in the market and rising price level. Moreover, inflation expectations often makes people to increase the purchase of real or financial assets rather than holding the money, considering hedge risk or make investment. As a result, the monetary supply become overabundance so that promote the rise of price level. Dotsey and King (1983) implied the aggregate supply and rational expectation theory to explore the monetary policy. Consequently, they suggest that the supply hypothesis and rational expectation are conducive to the draft of an activist monetary policy. Therefore, the implementation of the policy of the central bank should make the general price level changes can be identified by economic agents. Dotsey and King (1983) state that under the rational expectation assumption, the changes of money supply response to movements of interest rate can be identified by the agents in the economicShow MoreRelatedThe Triangular Phillips Curve Model Essay2275 Words   |  10 PagesThe triangular Phillips Curve which was proposed by Gordon (1996) states that the factors cause inflation can be summarized as demand pull, cost push and inflation inertia. Similarly, Gal and Gertler (1999) construct the a kind of hybrid New Keynesian Phillips Curve model and claim that the main factors that affect infla tion are the excess aggregate demand, inflation expectation and inflation inertia. In reality, the determinants of inflation are very complex, and the most common four mechanismsRead MoreThe Researches About The Causes Of Inflation Essay2290 Words   |  10 Pagestheoretical explains of inflation causes The triangular Phillips Curve which was proposed by Gordon (1996) states that the factors cause inflation can be summarized as demand pull, cost push and inflation inertia. Similarly, Gal and Gertler (1999) construct the a kind of hybrid New Keynesian Phillips Curve model and claim that the main factors that affect inflation are the excess aggregate demand, inflation expectation and inflation inertia. In reality, the determinants of inflation are very complexRead MoreThe Quantity Theory Of Money7121 Words   |  29 Pagessupply and price level is also supported by Milton Friedman and Rational Expectation Hypothesis. Milton Friedman argues that Phillips curve exists only in the short run but not in the long run. This means that the Phillips curve is vertical in the long run which again means there is a direct and proportional relationship between money supply and prices in the long run. (Friedman, 1968) Similarly, the Rational Expectation Hypothesis (REH) postulates that Phillips curve does not exist in the shortRead MoreOrganisational Theory230255 Words   |  922 Pagesattend school or university as students, we inevitably give up some of our freedom of choice over what we can do and how we do it. We lose some of our autonomy, and our behaviour becomes channelled in particular directions by the requirements and expectations of the other people involved in those organizations. The result is that in our contemporary world, organizations are a central and allpervasive phenomena that impact upon all of us, all our lives, from maternity hospital to funeral parlour. Indeed