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Chapter 7 The Stock Market, the Theory of Rational Expectations, and the Efficient Markets Hypothesis 251

68)

Expectations play a key role in the theory of asset demand and the determination of interest rates. According to the _____ effect interest rates _____ when money growth _____.

(a)

Fisher; rise; increases

(b)

Fisher; fall; increases

(c)

Fisher; rise; decreases

(d)

Pigou; rise; increases

(e)

Pigou; fall; decreases

Answer:

Question Status: Previous Edition

69)

Expectations play a key role in the theories that attempt to explain the risk and term structure of interest rates. For example, expectations of future _____ interest rates play a central role in the determination of _____ interest rates.

(a)

short-term; long-term

(b)

long-term; short-term

(c)

market; government

(d)

government; market

Answer:

Question Status: Previous Edition

70)

The theory of rational expectations, when applied to financial markets, is known as

(a)

monetarism.

(b)

the efficient markets hypothesis.

(c)

the theory of strict liability.

(d)

the theory of impossibility.

Answer:

Question Status: Revised

71)

The efficient markets hypothesis

(a)

is an application of rational expectations to the pricing of financial securities.

(b)

is based on the assumption that prices of securities fully reflect all available information.

(c)

holds that the expected return on a security equals the equilibrium return.

(d)

holds that all of the above are true.

(e)

holds that only (a) and (b) of the above are true.

Answer:

Question Status: Previous Edition

72)

Another way to state the efficient markets condition is: in an efficient market,

(a)

unexploited profit opportunities will be quickly eliminated.

(b)

unexploited profit opportunities will never exist.

(c)

arbitrageurs guarantee that unexploited profit opportunities never exist.

(d)

both (a) and (c) of the above occur.

Answer:

Question Status: Revised

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