Expectations Effect

This refers to the economic theory that future expectations for the economy have a greater influence than government interventions.

Expectations Effectassumes that by acting on the expectation of a future change that change is more likely to come about. For example, if a supplier believes the price of its product will be higher in the future, rationally it would reduce production today to save resources for the future higher value product; this would reduce the current supply of the product and hence increase its price assuming demand remains constant.

Expectations Effect is a term normally found in business economics and financial management.

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