Chapter 9: How laypeople understand the economy Flashcards
Why are we interested in the general publics’ understanding of the economy?
(1) It is essential for democracy and it affects public policy through the political process
(2) economic beliefs affect economic behavior and constitute an important component of economic modelling
Why is economics so difficult to understand (5)?
(1) Economic theory functions as a complex causal system while people are remarkably poor at combining causal links into a system
(2) Scope of explanations is overly narrow and involve too few aspects
(3) Many of the basis factors are aggregated variables, people are ill equirpped to cope with aggregated effects
(4) People are not comfortable with equilibrium seeking
(5) News and written press give someone the feeling it is expected that the economy is understood. This is different from let’s say civil engineering
Lay views on inflation (3)!
(1) Price setters (e.g. shopkeepers) –> inflations raises operating costs and lowers demand
(2) Consumers –> inflation means higher prices but not an equal higher salary, thus wages lag consumer price index
(3) The economic naïve individuals: inflation is bad and about prices and money, prices are higher and money is worth less. Missing from this perspective is wages, unemployment, government and central bank
How do non-economists look at inflation?
Inflation is bad. Zero inflation would be best.
Different from economist view. This because non-economists believe inflation will make them poorer
What is the difference between experts and lay views on inflation and unemployment?
(1) Experts -> philips curve, inverse relation between inflation and unemployment
(2) lay view –> higher inflation means higher unemployment and the other way around
Explain the good-begets-good heuristic?
(1) If both options belong to the same pole (g.g. are seen as good/good or bad/bad) an increase in one will lead to an increase in the other
(2) If both options belong to a different pole (e.g., are seen as good/bad or bad/good), an increase in one will lead to a drop in the other
What are macroeconomic consequences of the good-begets-good heuristic regarding rising actual and expected inflation? (3)
(2) Lower actual and future economic growth
(3) Higher unemployment
(4) Lower profits
What is intentional causality?
People think that stuff is caused by intend and not due to a malfunctioning system. Someone wants something to happen. This is the source for conspiracy thinking
What has research found about improving financial literacy (2)?
(1) participating in economic courses does not lead to improvement in economic knowledge or understanding
(2) Attempts to increase financial literacy have a negligible effect on financial behavior, thus limiting effect of counselling programmes
