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Chapter 7 The Stock Market, the Theory of Rational Expectations, and the Efficient Markets Hypothesis 247

50)

Rational expectations forecast errors will on average be _____ and therefore _____ be predicted ahead of time.

(a)

positive; can

(b)

positive; cannot

(c)

negative; can

(d)

zero; can

(e)

zero; cannot

Answer:

Question Status: Study Guide

51)

Reasons why an expectation might fail to be rational include the fact that

(a)

people might fail to use available information in making their expectation the best guess possible of the future.

(b)

people may be unaware of available information.

(c)

people might fail to use information that is not yet available.

(d)

both (a) and (b) of the above are true.

Answer:

Question Status: Previous Edition

52)

People have a strong incentive to form rational expectations because

(a)

they are guaranteed of success in the stock market.

(b)

it is costly not to do so.

(c)

it is costly to do so.

(d)

none of the above are true.

Answer:

Question Status: Previous Edition

53)

If market participants notice that a variable behaves differently now than in the past, then, according to rational expectations theory, we can expect market participants to

(a)

change the way they form expectations about future values of the variable.

(b)

begin to make systematic mistakes.

(c)

no longer pay close attention to movements in this variable.

(d)

give up trying to forecast this variable.

Answer:

Question Status: Previous Edition

54)

The assumption that people make the best economic forecast they can, given the information available to them at the time, is called the

(a)

adaptive expectations hypothesis.

(b)

Lucas critique.

(c)

Ricardian equivalence theorem.

(d)

rational expectations theory.

Answer:

Question Status: Revised

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