the economics of money, banking, and financial markets

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7.4 The Efficient Market Hypothesis: Rational Expectations in Financial Markets

1. 
   

   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: B
   Diff: 1 Type: MC Page Ref: 147
   Skill: Recall
   Objective List: 7.2 Determine how information in the market affects asset prices

   
   


2. 
   

   Monetary economists and financial economists developed ____ theories on expectations
   formations.
   A) parallel
   B) opposing
   C) dissimilar
   D) unusual
   Answer: A
   Diff: 1 Type: MC Page Ref: 147
   Skill: Recall
   Objective List: 7.2 Determine how information in the market affects asset prices

   
   


3. 
   

   If the optimal forecast of the return on a security exceeds the equilibrium return, then
   ____.
   A) the market is inefficient
   B) no unexploited profit opportunities exist
   C) the market is in equilibrium
   D) the market is myopic
   Answer: A
   Diff: 2 Type: MC Page Ref: 147
   Skill: Recall
   Objective List: 7.2 Determine how information in the market affects asset prices

   
   


4. 
   

   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) unexploited profit opportunities never existed
   D) every financial market participant must be well informed about securities
   Answer: A
   Diff: 2 Type: MC Page Ref: 149
   Skill: Recall
   Objective List: 7.2 Determine how information in the market affects asset prices