economics is lowkey not a science bffr this shi is just humanities that men fw Flashcards
takes on the government
- smith heads and & public choice heads → government hurts
- mercantilists & keynesians → government helps
- monetarists → believed that government can help but usually hurts
- rational expectations economists → government does not have an effect
tenets of rational expectations theory
- markets will clear up
- people consider all available information in making economic decisions
why is the stock market considered evidence for rational expectations theorists
once information is public → instantly affects the market
efficient market hypothesis
the price of stocks already reflects expectations
why does government have little power over the stock market
- if they bought stock to raise prices → investors will sense the stock is overpriced
- if they sold stocks → the market will sense it is undervalued
Harry Markowitz’s 1952 “Portfolio Selection”
- many smaller investments > one big investment
- portfolio should not be diverse in one sector, rather across all sectors
William Sharpe
designed the Capital Asset Pricing Model → introduces concept of Beta (correlation between stocks movement with the market as a whole)
co-laureate Merton Miller & Franco Modigliani
companies would issue more bonds and sell fewer shares of stocks –> no matter how you split ownership, value is based on future earnings
robert lucas’ critique
says old behavior provides a poor basis for creating new policy
example: if government finds a stable, historic relationship between baseball games and GDP → attempts to raise GDP by increasing baseball games → economic actors will see this and change behavior
robert hall
argues mainstream models of consumption that rely on past income, wealth, interest rates
what was robert hall’s new model
two variables:
- last year’s consumption
- random variable → new information that can only be guessed
behavioral economics
- people look for short term gratification
- people do not always act rationally → typical behavior