Key Concepts and Summary

Key Concepts and Summary

Neoclassical perspective argues that, in the long run, the economy will adjust back to its potential GDP level of output through flexible price levels. Thus, the neoclassical perspective views the long-run AS curve as vertical. A rational expectations perspective argues that people have excellent information about economic events and how the economy works and that, as a result, price and other economic adjustments will happen very quickly. In adaptive expectations theory, people have limited information about economic information and how the economy works, and so price and other economic adjustments can be slow.

Glossary

adaptive expectations

the theory that people look at past experience and gradually adapt their beliefs and behavior as circumstances change

neoclassical perspective

the philosophy that, in the long run, the business cycle will fluctuate around the potential, or full-employment, level of output

physical capital per person

the amount and kind of machinery and equipment available to help a person produce a good or service

rational expectations

the theory that people form the most accurate possible expectations about the future that they can, using all information available to them