Question

How might the understanding of behavioral economics assist or fail to assist in forecasting what is ahead in the business cycle?

Answer 1

The proper understanding of behavioral economics assist or fail to assist in forecasting what is ahead in the business cycle as through behavioural economics we assumes that consumer behave in a rational manner and the observation of consumer’s behaviour shows the changing patterns of our economy as consumer is very responsive to the changes occurs in our economy. Behavioural economics use macroeconomic models to forecast the economic fluctuation or ups and downs of business cycle.

Business cycle is a process which reflects the different conditions of our economy from boom to recessions. Behavioural economics observes the economic conditions and then draw conclusions how the economy is going to fluctuate means if prices are increasing and economy is going towards inflation than there will be situation of boom and if prices are decreasing due to low supply of money in the economy than there will be depression in the economy.

If there is proper understanding of behavioral economics than it will lead to correct forecasting about the occurrence of business cycle in the economy and if there will be no clear understanding then it will lead to wrong forecasting which will affect our economy negatively.