Question 1

In October 2008, the stock market crashed, falling by ________ from its peak value a year earlier.

Accepted Answer

A)  over 40 percent 
B)  over 30 percent 
C)  over 50 percent 
D)  over 25 percent 
A)  over 40 percent 
B)  over 30 percent 
C)  over 50 percent 
D)  over 25 percent

Question 2

The advantage of a "buy-and-hold strategy" is that ________.

Accepted Answer

A)  net profits will tend to be higher because there will be fewer brokerage commissions 
B)  losses will eventually be eliminated 
C)  the longer a stock is held, the higher will be its price 
D)  profits are guaranteed 
A)  net profits will tend to be higher because there will be fewer brokerage commissions 
B)  losses will eventually be eliminated 
C)  the longer a stock is held, the higher will be its price 
D)  profits are guaranteed

Question 3

One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate.

Accepted Answer

A)  an increasing 
B)  a fast 
C)  a constant 
D)  an escalating 
A)  an increasing 
B)  a fast 
C)  a constant 
D)  an escalating

Question 4

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.

Accepted Answer

A)  Behavioral finance 
B)  Strategical finance 
C)  Methodical finance 
D)  Procedural finance 
A)  Behavioral finance 
B)  Strategical finance 
C)  Methodical finance 
D)  Procedural finance

Question 5

If a market participant believes that a stock price is irrationally high, they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called ________.

Accepted Answer

A)  short selling 
B)  double dealing 
C)  undermining 
D)  long marketing 
A)  short selling 
B)  double dealing 
C)  undermining 
D)  long marketing

Question 6

An increase in uncertainty for the economy will ________.

Accepted Answer

A)  increase stock prices due to a higher required return 
B)  not affect stock prices 
C)  increase stock prices due to a lower required return 
D)  depress stock prices due to a higher required return 
A)  increase stock prices due to a higher required return 
B)  not affect stock prices 
C)  increase stock prices due to a lower required return 
D)  depress stock prices due to a higher required return

Question 7

________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.

Accepted Answer

A)  Loss fundamentals 
B)  Loss aversion 
C)  Loss leader 
D)  Loss cycle 
A)  Loss fundamentals 
B)  Loss aversion 
C)  Loss leader 
D)  Loss cycle

Question 8

Rational expectations forecast errors will on average be ________ and therefore ________ be predicted ahead of time.

Accepted Answer

A)  positive; can 
B)  positive; cannot 
C)  negative; can 
D)  zero; cannot 
A)  positive; can 
B)  positive; cannot 
C)  negative; can 
D)  zero; cannot

Question 9

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 ________.

Accepted Answer

A)  irrational 
B)  rational 
C)  adaptive 
D)  reasonable 
A)  irrational 
B)  rational 
C)  adaptive 
D)  reasonable

Question 10

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

Accepted Answer

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 
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

Question 11

The elimination of unexploited profit opportunities requires that ________ market participants be well informed.

Accepted Answer

A)  all 
B)  a few 
C)  zero 
D)  many 
A)  all 
B)  a few 
C)  zero 
D)  many

Question 12

Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is ________.

Accepted Answer

A)  clearly inconsistent with the efficient markets hypothesis 
B)  consistent with the efficient markets hypothesis if the earnings were not as high as anticipated 
C)  consistent with the efficient markets hypothesis if the earnings were not as low as anticipated 
D)  consistent with the efficient markets hypothesis if the favorable earnings were expected 
A)  clearly inconsistent with the efficient markets hypothesis 
B)  consistent with the efficient markets hypothesis if the earnings were not as high as anticipated 
C)  consistent with the efficient markets hypothesis if the earnings were not as low as anticipated 
D)  consistent with the efficient markets hypothesis if the favorable earnings were expected

Question 13

According to the efficient markets hypothesis, purchasing the reports of financial analysts ________.

Accepted Answer

A)  is likely to increase one's returns by an average of 10 percent 
B)  is likely to increase one's returns by about 3 to 5 percent 
C)  is not likely to be an effective strategy for increasing financial returns 
D)  is likely to increase one's returns by an average of about 2 to 3 percent 
A)  is likely to increase one's returns by an average of 10 percent 
B)  is likely to increase one's returns by about 3 to 5 percent 
C)  is not likely to be an effective strategy for increasing financial returns 
D)  is likely to increase one's returns by an average of about 2 to 3 percent

Question 14

Monetary economists and financial economists developed ________ theories on expectations formations.

Accepted Answer

A)  parallel 
B)  opposing 
C)  dissimilar 
D)  unusual 
A)  parallel 
B)  opposing 
C)  dissimilar 
D)  unusual

Question 15

A corporation's dividend payment is set by ________.

Accepted Answer

A)  its board of directors 
B)  its debtholders 
C)  the corporation's CFO (chief financial officer) 
D)  the stockholders themselves 
A)  its board of directors 
B)  its debtholders 
C)  the corporation's CFO (chief financial officer) 
D)  the stockholders themselves

Question 16

An expectation may fail to be rational if ________.

Accepted Answer

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 
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

Question 17

The value of any investment is found by computing the ________.

Accepted Answer

A)  present value of all future sales 
B)  present value of all future liabilities 
C)  future value of all future expenses 
D)  present value of all future cash flows 
A)  present value of all future sales 
B)  present value of all future liabilities 
C)  future value of all future expenses 
D)  present value of all future cash flows

Question 18

Loss aversion can explain why very little ________ actually takes place in the securities market.

Accepted Answer

A)  short selling 
B)  bargaining 
C)  bartering 
D)  negotiating 
A)  short selling 
B)  bargaining 
C)  bartering 
D)  negotiating

Question 19

Dividends are paid from ________.

Accepted Answer

A)  liabilities 
B)  debts 
C)  net earnings 
D)  interest 
A)  liabilities 
B)  debts 
C)  net earnings 
D)  interest

Question 20

Explain why the Gordon growth model does not need to incorporate the end period price.

Accepted Answer

Students must explain that sin

Exam 7: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

In October 2008, the stock market crashed, falling by ________ from its peak value a year earlier.

The advantage of a "buy-and-hold strategy" is that ________.

One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate.

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.

If a market participant believes that a stock price is irrationally high, they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called ________.

An increase in uncertainty for the economy will ________.

________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.

Rational expectations forecast errors will on average be ________ and therefore ________ be predicted ahead of time.

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 ________.

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

The elimination of unexploited profit opportunities requires that ________ market participants be well informed.

Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is ________.

According to the efficient markets hypothesis, purchasing the reports of financial analysts ________.

Monetary economists and financial economists developed ________ theories on expectations formations.

A corporation's dividend payment is set by ________.

An expectation may fail to be rational if ________.

The value of any investment is found by computing the ________.

Loss aversion can explain why very little ________ actually takes place in the securities market.

Dividends are paid from ________.

Explain why the Gordon growth model does not need to incorporate the end period price.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

An Economic Analysis of Financial Structure

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, Inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Filters

Rational expectations forecast errors will on average be and therefore be predicted ahead of time.