Cagan's Rule

Cagan's Rule is an economic principle that describes how people's expectations about future inflation can influence their current behavior, particularly regarding spending and saving. Essentially, if people expect prices to rise in the future, they are more likely to spend money now rather than save it, which can further drive inflation. This notion highlights the psychological aspect of economics, showing that our beliefs about the economy can significantly impact actual economic activity, creating a cycle that can amplify inflationary pressures. Understanding this rule helps comprehend the relationship between expectations and economic behavior.