Understanding Economic Equilibrium

CHAPTER 7

Great Expectations

You’re up in the morning and getting ready for the day ahead. The forecast is for a chillier temperature than yesterday and afternoon rain, so you dress in warm clothes, throw an umbrella in the car, and cancel your three o’clock tee time. Those expectations might not be realized, but they affect your preparation and plans for the day.

The same applies to the macroeconomy. In Chapter 6, we addressed the importance of personal consumption to the U.S. economy. Much of what people spend is determined by what they expect their future incomes to be. If they are confident their incomes will increase, they are likely to behave consistent with that expectation. Someone anticipating a promotion and raise might buy a car or ...