Question

A) What does rational expectations have to do with the Efficient Market Hypothesis (describe/explain)?

B) There is some evidence that the rational expectations hypothesis does not always hold. List and describe/explain two reasons why the rational expectations hypothesis might not hold for, say, the Dow Jones Industrial Average

Answer 1

Efficient market hypothesis is really application of rational expectations theory to share market. In other words both say that investors take all information into consideration when they invest into shares and it is quite difficult to misled them

B it is not enough to explain persistent and substantial deviations deviations that we have experienced

It ignores costs of gathering information. It simply assumes too much about knowledge of all economic agents. E. G many people do not know how to interpret various indexes