Question

1. What are examples of rational irrationality from the subprime crisis?

2. What are the competing views of the phillips curve (friedman vs. keynes)

please answer both if you can if not just one is fine!

Answer 1

1) US Economic condition was worsely affected between in the years of 2007 and 2010. In those periods, The Borrowers was granted loan as against less repaying capacity. This in turn resulted in increase in high Interest Rate and the Opporunity of providing credit was drastically reduced to very low level. Credit Default Swap (CDS) is the situation of making the agreement between Debtor and Creditor in which Debtor sells securities in default when it resulted in Bad Debt in order to repay the amount.

Based on the above explained Econonomic Situations, Rational behaviour was juded accordingly by the following supportive facts. The Rational behaviour was mainly adopted by the term Homo Economicus. It is nothing but the analysis of Rational behaviour of Human Nature. It was correlated with the Prudence knowledge of the People taking decision on Financial Activities.

Example for Rational behaviour arrived from the Subprime Crisis:- In the Period of above Sub-prime Crises, The All Drivers who believed in Rational Thinking in dealing of Monetary Activities, took Auto-insurance Policy. Few Drivers witnessed the very low insured amount of outcome when they met Accident, when compared with the Drivers who did not took any Auto-Insurance Policy. The low amount of insured amount was due to the then less interest rate when all Mortaged Property was duly coupled with Less Appreciation Value.

Example for Irrational behaviour arrived from the Subprime Crisis:-  The people with irrational behaviour will have an insight knowledge of practical situations. This was occurred when Housing Price Bubble aroused as the part of the Subprime Crisis. The House owners has Money Illusion on their assets. Thus they Overestimated the Value for their houses. They speculated that the value of the houses will increases to the higher level in the future. They had an blind thought that they can borrow much and spend more for their needs. Without clear picture of the value of their Assets nor the Forecasting the value of their assets in future it awaited more Risk to the people. So the then People involved in more borrowing activities and consumption activites to the high Extreme Level.