Why are expectations so important in macroeconomic theory? Explain the different approaches to expectation adopted by economists from Keynes onward.

Expectations are crucial in determining the success of government policy on unemployment and inflation. Whatever people expect to happen, their actions will tend to make it happen. At the time that economic agents-households, firms, the government make choices, they are generally uncertain about the future. Assumptions about how these agents form expectations for the future shape the properties of any dynamic economic model. Great debates have gone on among economists and psychologists in recent years …

…following. This is the new classical school. Leading exponents of new classical macroeconomics include Robert Lucas and Thomas Sargent in the USA and Patrick Minford in the UK. This school of economists believe that markets clear virtually instantaneously and that expectations are formed rationally. ------------------------------------------------------------------------ **Bibliography** - Macroeconomics : Theories & Policies By R.T. Froyen Sixth Edition 1999 - Macroeconomics By R.J. Gordon Seventh Edition 1997 - Economics A New Approach By A.G. Anderton New Edition 1992