1. Describe the criticisms of the rational expectations theory.

Expert Solution

Rational expectations are model consistent expectations,it's ensure internal consistency in models involving uncertainty.this is expected value in mathematical sense .in order to be able to compute expected value, individual must know the true economic model ,it's parameters and the nature of stochastic processes that govern it's evolution.A stronger test can be conducted if the one above had failed to reject the null.the residuals of the above regression can themselves be regressed on other variables whose values are available to agents when they are forming the expectations.if any of this variable has a significant effect on the residual,agents can be said to have failed to take them sufficiently into account when forming their expectations, leading to needlessly high variance of forecasting residuals and thus more uncertainty than is necessary about their prediction which hampers their efforts to use the prediction in their economic choices for things .

Rahul Sunny answered 2 years ago

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