Question 1

To say that stock prices follow a "random walk" is to argue that stock prices ________.

Accepted Answer

A)  rise, then fall, then rise again 
B)  rise, then fall in a predictable fashion 
C)  tend to follow trends 
D)  cannot be predicted based on past trends 
A)  rise, then fall, then rise again 
B)  rise, then fall in a predictable fashion 
C)  tend to follow trends 
D)  cannot be predicted based on past trends

Question 2

If market participants notice that a variable behaves differently now than in the past,then,according to rational expectations theory,we can expect market participants to ________.

Accepted Answer

A)  change the way they form expectations about future values of the variable 
B)  begin to make systematic mistakes 
C)  no longer pay close attention to movements in this variable 
D)  give up trying to forecast this variable 
A)  change the way they form expectations about future values of the variable 
B)  begin to make systematic mistakes 
C)  no longer pay close attention to movements in this variable 
D)  give up trying to forecast this variable

Question 3

________ and ________ may provide an explanation for stock market bubbles.

Accepted Answer

A)  Overconfidence; social contagion 
B)  Underconfidence; social contagion 
C)  Overconfidence; social isolationism 
D)  Underconfidence; social isolationism 
A)  Overconfidence; social contagion 
B)  Underconfidence; social contagion 
C)  Overconfidence; social isolationism 
D)  Underconfidence; social isolationism

Question 4

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 5

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 6

Using the one-period valuation model,assuming a year-end dividend of $1.00,an expected sales price of $100,and a required rate of return of 5 percent,the current price of the stock would be ________.

Accepted Answer

A)  $110.00 
B)  $101.00 
C)  $100.00 
D)  $96.19 
A)  $110.00 
B)  $101.00 
C)  $100.00 
D)  $96.19

Question 7

New information that might lead to a decrease in an asset's price might be ________.

Accepted Answer

A)  an expected decrease in the level of future dividends 
B)  a decrease in the required rate of return 
C)  an expected increase in the dividend growth rate 
D)  an expected increase in the future sales price 
A)  an expected decrease in the level of future dividends 
B)  a decrease in the required rate of return 
C)  an expected increase in the dividend growth rate 
D)  an expected increase in the future sales price

Question 8

The subprime financial crisis lead to a decline in stock prices because ________.

Accepted Answer

A)  of a lowered expected dividend growth rate 
B)  of a lowered required return on investment in equity 
C)  higher expected future stock prices 
D)  higher current dividends 
A)  of a lowered expected dividend growth rate 
B)  of a lowered required return on investment in equity 
C)  higher expected future stock prices 
D)  higher current dividends

Question 9

A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________,everything else held constant.

Accepted Answer

A)  reduces; future sales price; expected rate of return 
B)  reduces; current dividend; expected rate of return 
C)  increases; required rate of return; future sales price 
D)  increases; required rate of return; dividend growth rate 
A)  reduces; future sales price; expected rate of return 
B)  reduces; current dividend; expected rate of return 
C)  increases; required rate of return; future sales price 
D)  increases; required rate of return; dividend growth rate

Question 10

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 11

The analysts predict that the price of corporation's XYZ stock one year from now will be $120.XYZ announced that is not going to pay dividends next year.You decide that you would be satisfied to earn a 20 percent on the investment on this stock,thus,this stock is worth ________ for you now.

Accepted Answer

A)  $100 
B)  $120 
C)  $130 
D)  $90 
A)  $100 
B)  $120 
C)  $130 
D)  $90

Question 12

Assume that your economics professor announces to your class that after thirty years of giving exams only on scheduled dates,this semester she will give only surprise quizzes.What is the rational expectation response to this new policy? Why does your self-interest require that you change your behavior? What would the consequences be for students who changed their expectations about exams adaptively?

Accepted Answer

Instead of being able to study for exams

Question 13

Information plays an important role in asset pricing because it allows the buyer to more accurately judge ________.

Accepted Answer

A)  liquidity 
B)  risk 
C)  capital 
D)  policy 
A)  liquidity 
B)  risk 
C)  capital 
D)  policy

Question 14

________ 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 15

In the one-period valuation model,the current stock price increases if ________.

Accepted Answer

A)  the expected sales price increases 
B)  the expected sales price falls 
C)  the required return increases 
D)  dividends are cut 
A)  the expected sales price increases 
B)  the expected sales price falls 
C)  the required return increases 
D)  dividends are cut

Question 16

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 17

According to rational expectations theory,forecast errors of expectations ________.

Accepted Answer

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 
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

Question 18

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 19

If additional information is not used when forming an optimal forecast because it is not available at that time,then expectations are ________.

Accepted Answer

A)  obviously formed irrationally 
B)  still considered to be formed rationally 
C)  formed adaptively 
D)  formed equivalently 
A)  obviously formed irrationally 
B)  still considered to be formed rationally 
C)  formed adaptively 
D)  formed equivalently

Question 20

In the generalized dividend model,a future sales price far in the future does not affect the current stock price because ________.

Accepted Answer

A)  the present value cannot be computed 
B)  the present value is almost zero 
C)  the sales price does not affect the current price 
D)  the stock may never be sold 
A)  the present value cannot be computed 
B)  the present value is almost zero 
C)  the sales price does not affect the current price 
D)  the stock may never be sold

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

To say that stock prices follow a "random walk" is to argue that stock prices ________.

If market participants notice that a variable behaves differently now than in the past,then,according to rational expectations theory,we can expect market participants to ________.

________ and ________ may provide an explanation for stock market bubbles.

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

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

Using the one-period valuation model,assuming a year-end dividend of $1.00,an expected sales price of $100,and a required rate of return of 5 percent,the current price of the stock would be ________.

New information that might lead to a decrease in an asset's price might be ________.

The subprime financial crisis lead to a decline in stock prices because ________.

A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________,everything else held constant.

Dividends are paid from ________.

The analysts predict that the price of corporation's XYZ stock one year from now will be $120.XYZ announced that is not going to pay dividends next year.You decide that you would be satisfied to earn a 20 percent on the investment on this stock,thus,this stock is worth ________ for you now.

Information plays an important role in asset pricing because it allows the buyer to more accurately judge ________.

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

In the one-period valuation model,the current stock price increases if ________.

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

According to rational expectations theory,forecast errors of expectations ________.

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

If additional information is not used when forming an optimal forecast because it is not available at that time,then expectations are ________.

In the generalized dividend model,a future sales price far in the future does not affect the current stock price because ________.

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

An Economic Analysis of Financial Structure

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

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

The ISLM Model

Filters

and may provide an explanation for stock market bubbles.

A monetary expansion stock prices due to a decrease in the and an increase in the ,everything else held constant.