The Importance Of Economic Expectations

Register to read the introduction… An extrapolative expectation is based on the idea that a trend will continue. Historically based expectations are based on past events about the future and rational expectations are forward-looking expectations that use available information. Consumer attitudes and expectations are important to economic recovery because consumer spending drives 70% of economic growth ("The Conference Board", 2012). For a lagging economy to grow consumer confidence must increase. The Consumer Confidence Index (CCI), driven 60% by the results from the Expectations Index, is designed to measure how people currently feel about both the current and general state of the economy as well as how they see things in the future. The September 2012 CCI report stands at 70.3, up from 61.3 in August 2012 ("The Conference Board", 2012). The U.S. Real Gross Domestic Product, which measures total financial value of all final goods and services produced, increased at an annual rate of 1.3 % in the second quarter of 2012 ("Bureau Of Economic Analysis", 2012). Although these numbers look promising and indicators are leaning toward a slow but accelerated growth, consumer expectations will continue to affect demand. The economy’s performance in the next year will also depend on the 2012 election, what Congress and the administration do, unemployment rates, interest rates, and inflation. Expectations are personal feelings of confidence. Despite the improving trend, economic confidence has not recovered fully to the same levels reported in 2009. Going forward the question still remains, will the current increasing consumer confidence continue or fall by the …show more content…
It was lowered by ½ point on December 17, 2008, the 10th rate cut in over a year. The Federal Reserve took significant actions in response to the financial crisis to help stabilize the U.S. economy and financial system. They reduced the level of short-term interest rates to near zero and purchased large quantities of longer-term Treasury and government agency securities in an effort to reduce longer-term interest rates. Low interest rates help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses. Federal Chairman Ben Bernanke presented his semi-annual monetary policy testimony to the House of Financial Services Committee this month. In his opening statements, he said that the Federal Reserve will hold interest rates at current levels until 2014. The interest rate effect is a major effect on demand and supply. As prices rise, households and businesses require more money to handle their transactions. However, the supply of money is fixed. The demand for a fixed supply of money causes the price of money, the interest rate, to rise. As the interest rate rises, spending and purchasing depending on interest rates will decline. The Keynesian view of monetary policy and fiscal policy emphasizes the importance of interest rates as a guide to the amount of money or liquidity in the economy. The classical view downplays the importance of interest rates and focuses instead on the amount of money and liquidity in the banking system. (thought this would be helpful for the last