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An expectation may fail to be rational if ____.
A) relevant information was not available at the time the forecast is made
B) relevant information is available but ignored at the time the forecast is made
C) information changes after the forecast is made
D) information was available to insiders only
Answer: B
Diff: 1 Type: MC Page Ref: 145
Skill: Recall
Objective List: 7.2 Determine how information in the market affects asset prices
According to rational expectations theory, forecast errors of expectations ____.
A) are more likely to be negative than positive
B) are more likely to be positive than negative
C) tend to be persistently high or low
D) are unpredictable
Answer: D
Diff: 1 Type: MC Page Ref: 145 - 146
Skill: Recall
Objective List: 7.2 Determine how information in the market affects asset prices
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; cannot
Answer: D
Diff: 2 Type: MC Page Ref: 146
Skill: Recall
Objective List: 7.2 Determine how information in the market affects asset prices
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) everyone wants to be rational
Answer: B
Diff: 2 Type: MC Page Ref: 145 - 146
Skill: Applied
Objective List: 7.2 Determine how information in the market affects asset prices