Animal Sprits, written by George A Akerlof and Robert J. Shiller analyses the standard economic principles and reveals the disasters that account for human emotions. In the first part of the book, George A. Akerlof and Robert J. Shiller says that there are five main animal sprits that have an impact on global economics. These five components of human psychology contradict the traditions of economic theory and explain the recent economic cycles. These include: confidence, fairness, corruption and bad faith, money illusion, and stories. Aklerof and Shiller in the second part of the book go onto to connect these animal spirits to economics examples and address eight economics. These eight questions cover economics depressions, financial crisis,
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Money illusion often affects different characteristics of the economy, which include debt and wage contracts and accounting. Irving Fishers Book, The Money Illusion, gives us an example of a woman who had a $50,000 bond thought that it worth the same amount it was just a few years ago. Fisher explained to the woman that inflation had occurred and the woman claims that her advisor did not tell her that inflation would occur or that the real value would change (Aklerlof and Shiller 42). The Phillips curve looks at the relationship between unemployment rate and the inflation rate. The inverse relationship was stable for many years, but in the 1960’s it spiraled out of control due to the surge of energy price stocks. Milton Friedman argued that many government polices pushes the unemployment rate below its natural rate which creates inflation (Aklerlof and Shiller 44 and 45). The natural rate of unemployment includes frictional, structural, and surplus unemployment. Milton also said that workers were not the issue for money illusion and that many people did not look at inflation as a factor. The cure for this dangerous cycle of inflation is a recession. Another issue brought up when talking about money illusions is that labor contracts should have COLAs, which are cost of living adjustments. In recent studies it shows that about 19% of wage contracts contain COLAs and the COLAs come in after a certain amount of inflation (Aklerlof and Shiller 48). When there are times of low inflation, people accept the concept of money illusion because it costs a very low amount and it is
Money illusion often affects different characteristics of the economy, which include debt and wage contracts and accounting. Irving Fishers Book, The Money Illusion, gives us an example of a woman who had a $50,000 bond thought that it worth the same amount it was just a few years ago. Fisher explained to the woman that inflation had occurred and the woman claims that her advisor did not tell her that inflation would occur or that the real value would change (Aklerlof and Shiller 42). The Phillips curve looks at the relationship between unemployment rate and the inflation rate. The inverse relationship was stable for many years, but in the 1960’s it spiraled out of control due to the surge of energy price stocks. Milton Friedman argued that many government polices pushes the unemployment rate below its natural rate which creates inflation (Aklerlof and Shiller 44 and 45). The natural rate of unemployment includes frictional, structural, and surplus unemployment. Milton also said that workers were not the issue for money illusion and that many people did not look at inflation as a factor. The cure for this dangerous cycle of inflation is a recession. Another issue brought up when talking about money illusions is that labor contracts should have COLAs, which are cost of living adjustments. In recent studies it shows that about 19% of wage contracts contain COLAs and the COLAs come in after a certain amount of inflation (Aklerlof and Shiller 48). When there are times of low inflation, people accept the concept of money illusion because it costs a very low amount and it is