Question

2. What is the difference between rational expectations and adaptive expectations? 3. Do neoclassical economists tend to focus more on long term economic growth or on recessions? Explain briefly.

Answer 1

2. Rational expectations: the future can be predicted in some way and are more informed.
Adaptive expectations: handles things as they happen and builds on past experiences

Rational expectations ensure internal consistency in uncertain models. To order to achieve consistency within a model, the model's estimates of future values of economically relevant variables are presumed to be the same as those of the model's decision-makers, given their set of information, the complexity of the random processes involved, and model structure. The rational expectations are used in many contemporary macroeconomic models in particular. If the economy suffers from constantly rising inflation rates (maybe because of government policies) under adaptive expectations, people would be assumed to underestimate inflation at all times. Many economists have considered this unrealistic, believing that sooner or later rational individuals would realize the trend and take it into consideration in shaping their expectations.

3. Neoclassical economists are more focused on long-term economic growth than on recession fighting. This is because in a few years the recessions of neoclassical economists will be gone and people will not be able to do much to end recessions.