economics is lowkey not a science bffr this shi is just humanities that men fw

Question 1

takes on the government

Answer 1

• 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

Question 2

tenets of rational expectations theory

Answer 2

• markets will clear up
• people consider all available information in making economic decisions

Question 3

why is the stock market considered evidence for rational expectations theorists

Answer 3

once information is public → instantly affects the market

Question 4

efficient market hypothesis

Answer 4

the price of stocks already reflects expectations

Question 5

why does government have little power over the stock market

Answer 5

• 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

Question 6

Harry Markowitz’s 1952 “Portfolio Selection”

Answer 6

• many smaller investments > one big investment
• portfolio should not be diverse in one sector, rather across all sectors

Question 7

William Sharpe

Answer 7

designed the Capital Asset Pricing Model → introduces concept of Beta (correlation between stocks movement with the market as a whole)

Question 8

co-laureate Merton Miller & Franco Modigliani

Answer 8

companies would issue more bonds and sell fewer shares of stocks –> no matter how you split ownership, value is based on future earnings

Question 9

robert lucas’ critique

Answer 9

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

Question 9

robert hall

Answer 9

argues mainstream models of consumption that rely on past income, wealth, interest rates

Question 9

what was robert hall’s new model

Answer 9

two variables:
- last year’s consumption
- random variable → new information that can only be guessed

Question 9

behavioral economics

Answer 9

• people look for short term gratification
• people do not always act rationally → typical behavior