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Chief Economist at the Bank of England, blamed “irrational behavior” for the failure of the BoE’s recent forecasting models. The failure to spot this irrationality had led policymakers (1) that the British economy would slow in the wake of last June’s Brexit referendum. Instead, British consumers have been on a heedless spending spree since the vote to leave the European Union; and, no less illogically, construction, manufacturing, and services have recovered.Haldane offers no explanation for this burst of irrational behavior. Nor can he: to him, irrationality simply means behavior that is (2) the forecasts derived from the BoE’s model.It’s not just Haldane or the BoE. What mainstream economists mean by rational behavior is not what you or I mean. In ordinary language, rational behavior is that which is reasonable under the circumstances. But in the rarefied world of neoclassical forecasting models, it means that people, equipped with detailed knowledge of themselves, their surroundings, and the future they face, act optimally to achieve their goals. That is, to act rationally is to act in a manner (3) economists’ models of rational behavior. Faced with contrary behavior, the economist reacts like the tailor who blames the customer for not fitting their newly tailored suit.
Yet the curious fact is that forecasts based on wildly unrealistic premises and assumptions may be perfectly (4) many situations. The reason is that most people are creatures of habit. Because their preferences and circumstances don’t in fact shift from day to day, and because they do try to get the best bargain when they shop around, their behavior will exhibit a high degree of regularity. This makes it predictable. You don’t need much economics to know that if the price of your (5) brand of toothpaste goes up, you are more likely to switch to a cheaper brand.
- 1) on prescience
2) for precognition
3) to forecast
4) of guess
5) with outlookAnswer – 3)
Explanation : to forecast - 1) contrary of
2) inconsistent with
3) consistent on4) lubricious with5) capricious on
Answer – 2)
Explanation : inconsistent with - 1) consistent with
2) agreeging on
3) varying by
4) incongruous in
5) erratic withAnswer – 1)
Explanation : consistent with - 1) convenient at
2) invaluable on
3) utilitarian of
4) advantageous with
5) serviceable inAnswer – 5)
Explanation : serviceable in - 1) regaled
2) criticized
3) rejected
4) preferred
5) spurnAnswer – 4)
Explanation : preferredCentral banks’ forecasting models essentially use the same logic. For example, the BoE (correctly) predicted a fall in the _(6)_[sterling] exchange rate following the Brexit vote. This would cause prices to rise – and therefore consumer spending to slow. Haldane still believes this will happen; the BoE’s mistake was more a matter of “timing” than of logic.
This is equivalent to saying that the Brexit vote changed nothing fundamental. People would go on behaving exactly as the model assumed, only with a different set of prices. But any prediction based on _(7)_[grinding] patterns of behavior will fail when something genuinely new happens.
Non-routine change causes behavior to become non-routine. But non-routine does not mean irrational. It means, in economics-speak, that the parameters have shifted. The assurance that tomorrow will be much like today has vanished. Our models of _(8)_[imperceptible] risk fail when faced with radical uncertainty.
The BoE conceded that Brexit would create a period of uncertainty, which would be bad for business. But the new situation created by Brexit was actually very different from what policymakers, their ears _(9)_[discompose] almost entirely to the City of London, expected. Instead of feeling worse off (as “rationally” they should), most “Leave” voters believe they will be better off.
Justified or not, the important fact about such sentiment is that it exists. In 1940, immediately after the fall of France to the Germans, the economist John Maynard Keynes wrote to a correspondent: “Speaking for myself I now feel completely confident for the first time that we will win the war.” Likewise, many Brits are now more confident about the future.This, then, is the problem – which Haldane _(10)_[glimpsed] but could not admit – with the BoE’s forecasting models. The important things affecting economies take place outside the self-contained limits of economic models. That is why macroeconomic forecasts end up on the rocks when the sea is not completely flat. - 1) inestimable
2) squandering
3) dishonorable
4) prodigality
5) No correction required.Answer – 5)
Explanation : The given word is correct. Hence no correction is required. - 1) stand stilling
2) imposing
3) recurring
4) screeching
5) No correction required.Answer – 3)
Explanation : recurring - 1) interruption
2) quantifiable
3) letup
4) screaming
5) No correction required.Answer – 2)
Explanation : quantifiable - 1) attuned
2) jumble
3) ruffle
4) derange
5) No correction required.Answer – 1)
Explanation : attuned - 1) fixedly
2) gawked
3) beamed
4) shuffle
5) No correction required.Answer – 5)
Explanation : The given word is correct. Hence no correction is required.
