By reading though Money and Banking books during this week I discovered a very intresting term—consumer or market expectation.In the 20 century,governments like to introduce a theory called Fine tunning which is trying to change the short term interest rate and hope an effect on the whole macro economy.Due to the expectation hypothesis,the change in interest rate will not effect the expected interest rate and lead to a very small percentage change of investment which hardly effect the aggregate demand.

So what we really need to do is to change people expectation of future.Thats what Monetary policy is about,Future guidance!Since different people have different thoughts,it is very hard to use one method to change their expectations.Some might judge the future based on the past which is called adaptive expectations and also we have specialized agents which include the risk inside but we cannot simple predict it 100% correct since there are Random errors which can not be eliminated,so people’s expectation is only a best guess to the future.I often feel very confused about how government can work on this to effect someones thoughts,If the interest rate was low,then people might assume it will rise as a common sense and how can government change this?Only by influencing the money supply?Doubt it!

Therefore sometimes the basic economic policies cannot work,As what Hyman Minsky’s model of financial instability states:Good times are boring and people starts to seek higher returns which lead to another uncertain behavior.

In my view,as what I once saw on a documentary,it states that stock market is absolutely random,we could hardly predict few percentage of it,So is expectation,They might change in a sight and influence the economy.