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Chapter 7 The Stock Market, the Theory of Rational Expectations, and the Efficient Markets Hypothesis 263

124)

In a rational bubble, investors can have

(a)

irrational expectations.

(b)

adaptive expectations.

(c)

rational expectations.

(d)

myopic expectations.

(e)

autoregressive expectations.

Answer:

Question Status: New

Essay Questions

1)

Explain the Gordon growth model of stock pricing. Explain how changes in each component affect the current stock price. On what assumptions is the model based?

2)

Assume that your economics professor announces to your class that after thirty years of giving exams only on scheduled dates, this semester she will give only surprise quizzes. What is the rational expectation response to this new policy? Why does your self-interest require that you change your behavior? What would the consequences be for students who changed their expectations about exams adaptively?

3)

List and explain three examples of evidence in favor of the efficient markets hypothesis, and three examples of evidence against market efficiency.

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