Answered: The fundamentals of traditional…

Macroeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter2: Some Tools Of The Economist

Section: Chapter Questions

Problem 14CQ

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The fundamentals of traditional theories (such as the Efficient Markets Hypothesis) a necessary foundation that allows us to then analyse departures from rationality, or are the principles of behavioural economics the new way to drive economic theory and thought? Why?

Give two instances of each irrationality (behavioural economics) and rationality in real life (traditional economics).

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

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