Question

The financial sector depends heavily on the expectations and the belief of the people in the system. The process of the credit creation happens by the multiplier effect. If investors don't hold belief on the system, the credit creation process would be delayed and the economy will take much longer time to come back to normal state. It will take a long time for the people to build belief in the financial institutions again. On the other side, the downturn in the manufacturing sector happens mostly from the lack of demand, which is not permanent.

What kind of factors impact expectations?

Answer 1

Expectations in economics refers to the forecasts or views that decision makers hold about future prices, sales , incomes, taxes, or other key variables. The importance of expectations is due to their often substantial impact on the current choices of firms and households, and hence on current prices and the overall level of economic activity.

Consumer expectations refer to the economic outlook of households. Expectations will have a significant bearing on current economic activity. If people expect an improvement in the economic outlook, they will be more willing to borrow and buy goods. But, with negative expectations they will cut back on spending and be more risk averse.

Expectations may also influence the impact of a government decision. For example if the government cut taxes, and finance it by borrowing more, at least some consumers, might expect the tax cut to prove temporary and in the future, and taxes will raise to payoff the government debt. Therefore, the consumers will not spend the tax cut.