New Keynesian models utilize price rigidities, market failures, asymmetric information and bounded rationality schemes to argue against the validity of classical dichotomy. An argument often used in new Keynesian settings is that of \textbf{sticky prices}. According to this idea, prices do not change as easily of quickly as aggregate demand changes and thus quantities must adjust to clear the markets. In monetary terms, if the quantity of money in an economy increases then it cannot be absorbed directly by prices, as monetarism suggests, because it takes time for prices to adjust. For instance, the price adjustment mechanism may be slowed down because printing new menus and price catalogs is costly for firms.
Critiques to CAPM model Two of the most renown critiques on this model is made by Eugene Fama and Kenneth French, who later have developed their own model to replace CAPM. Roll also criticize the flaws of the model. 3.1 A single factor is insufficient to estimate the returns of investment CAPM model only uses one variable which is Beta to explain the returns of a stock with the returns of the market. Beta is used to measure the risk or sensitivity of a project and CAPM model shows that the relation between required expected return and beta is linear (Jagannathan & Wang, 1996). However, according to Eugene Fama and Kenneth French, the correlation between market beta and U.S. common stocks.
Because of the questionable assumptions discussed above the CPAM model cannot precisely estimate the cost of equity capital. But this model can certainly indicate the way returns are determined in financial markets. Given that no other model can better predict the returns, and that the CPAM is simplified and elegant approach to ascertain the economic value of an asset, the CAPM is the model that has to be relied
(Kahn) This however brings to light the main faults of economics, the ability to truly know where in the economic cycle you are. (Kahn) As most of the predictive measures used are retrospective and the future is uncertain because the majority of peoples’ actions and fears are not based on solid universally accepted facts but on their interpretations of the information intertwined with their experiences and injected with their own optimism and pessimistic views. (Kahn) People are weird, and they do weird things for weird reasons. Economics is a reflection of people’s behaviors, therefor sometimes weird things happen. The Classical and Keynesian economic models attempt to make sense out economic activity.
We have to make trade-offs. We have to efficiently allocate resources. We have to do those things because resources are limited and cannot meet our own unlimited demands.Without scarcity, the science of economics would not exist. Economics is the study of production, distribution, and consumption of goods and services. If society did not have to make choices about what to produce, distribute, and consume, the study of those actions would be relatively boring.
Introduction A liquidity trap is a situation where conventional monetary policies are ineffectual because nominal interest rates are of insignificant value. In other words, applying monetary base into the economy is useless because the private sector views the base and bonds as perfect alternatives. Hence, a liquidity trap could occur in an economy with a flexible price or full-employment. The problem, however, in a liquidity trap is that markets believe that the central bank aim at price stability when presented with the opportunity and as a result any current monetary expansion is only short-term. This maintains that monetary policy is ineffective in a liquidity trap and that fiscal expansion is the solution.
Different schools in economic literature have proposed various relationships between money and other macroeconomic variables. Before the real business cycle theory, the prevailing thought was that aggregate demand and money stimulus, such as monetary shocks, would have a significant effect on the real economic activity, implying that money would cause economic activity. The concern among the Keynesians, the monetarists, the new classicals and the new Keynesians were not whether monetary shocks had any effect on output but the nature and the transmission mechanisms of these shocks. The Keynesians argued that money changes would influence both economic activity and price level through the interest rate and investment. The monetarists agreed with Keynesian transmission channel in the short run but in the long run they came to the same result with classical economists that money is neutral.
Keynes replaced an employment formula with a price formula. Essentially aggregate nominal prices are fixed and occur at a higher price than the price to clear the goods market. This results in less employment than would occur in a non-distorted market. You can work and produce all you want, but you can 't sell it.. This is important because sticky systems reasonably well do predict the economy while classical ones do
Investment is made by the investors to earn money in the form of returns. In the early years, investment was based on performance, forecasting, market timing and so on. This produced very ordinary results, which meant that investors were endowed with very ordinary futures, and little peace of mind. There was also a huge gap between available returns and actually received returns which forced them to search for the reasons. While examining the reasons for the deviations they identified that it is caused by fundamental mistakes in the decision-making process.
Since designing proper fiscal policy enables the government to attain economic objectives like reducing employment, price stabilization, income distribution, and economic growth. Not only the macro economy; fiscal policy has an impact on the micro economy through affecting households’ welfare. The historic myth of fiscal policy starts from the classical economics pioneered by Adam Smith who was argued the government should have a limited role in the economy. This is basically associated to their view that government policies would be ineffective or counterproductive at achieving their stated goals. Since, most classical economists believe that the government should not try actively to eliminate