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Chapter 7 The Stock Market, the Theory of Rational Expectations, and the Efficient Markets Hypothesis 245

Question Status: Previous Edition

40)

The view that expectations change relatively slowly over time in response to new information is known in economics as

(a)

rational expectations.

(b)

irrational expectations.

(c)

slow-response expectations.

(d)

adaptive expectations.

Answer:

Question Status: Previous Edition

41)

If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economics would say that expectation formation is

(a)

irrational.

(b)

rational.

(c)

adaptive.

(d)

the result of none of the above.

Answer:

Question Status: Previous Edition

42)

According to adaptive expectations,

(a)

expectations of inflation are viewed as being an average of past inflation rates.

(b)

expectations of inflation are viewed as being an average of expected future inflation rates.

(c)

expectations formation indicates that changes in expectations occur slowly over time as past data change.

(d)

only (a) and (b) of the above.

(e)

only (a) and (c) of the above.

Answer:

Question Status: Previous Edition

43)

The adaptive expectations view

(a)

regards expectations of inflation as being an average of past inflation rates.

(b)

has been criticized on the grounds that people will use more information than just past data on a single variable to form their expectations of that variable.

(c)

holds that expectations change relatively quickly.

(d)

only (a) and (b) of the above.

(e)

only (a) and (c) of the above.

Answer:

Question Status: Previous Edition

44)

The major criticism of the view that expectations are formed adaptively is that

(a)

this view ignores that people use more information than just past data to form their expectations.

(b)

it is easier to model adaptive expectations than it is to model rational expectations.

(c)

adaptive expectations models have no predictive power.

(d)

people are irrational and therefore never learn from past mistakes.

Answer:

Question Status: Previous Edition

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