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If expectations are formed adaptively, then people ____.
A) use more information than just past data on a single variable to form their expectations of that
variable
B) often change their expectations quickly when faced with new information
C) use only the information from past data on a single variable to form their expectations of that
variable
D) never change their expectations once they have been made
Answer: C
Diff: 2 Type: MC Page Ref: 144
Skill: Recall
Objective List: 7.2 Determine how information in the market affects asset prices
If during the past decade the average rate of monetary growth has been 5 percent and the
average inflation rate has been 5 percent, everything else held constant, when the Bank of
Canada announces that the new rate of monetary growth will be 10 percent, the adaptive
expectation forecast of the inflation rate is ____.
A) 5 percent
B) between 5 and 10 percent
C) 10 percent
D) more than 10 percent
Answer: A
Diff: 3 Type: MC Page Ref: 144
Skill: Applied
Objective List: 7.2 Determine how information in the market affects asset prices
The major criticism of the view that expectations are formed adaptively is that ____.
A) this view ignores the fact 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: A
Diff: 1 Type: MC Page Ref: 144
Skill: Recall
Objective List: 7.2 Determine how information in the market affects asset prices