Question 1

The theory of rational expectations, when applied to financial markets, is known as ________.

Accepted Answer

A) monetarism 
B) the efficient markets hypothesis 
C) the theory of strict liability 
D) the theory of impossibility 
A) monetarism 
B) the efficient markets hypothesis 
C) the theory of strict liability 
D) the theory of impossibility

Question 2

In the generalized dividend model, the current stock price is the sum of ________.

Accepted Answer

A) the actual value of the future dividend stream 
B) the present value of the future dividend stream 
C) the future value of the future dividend stream 
D) the present value of the future sales price 
A) the actual value of the future dividend stream 
B) the present value of the future dividend stream 
C) the future value of the future dividend stream 
D) the present value of the future sales price

Question 3

If expectations are formed adaptively, then people ________.

Accepted Answer

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 
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

Question 4

If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a false statement?

Accepted Answer

A) A stock that has done poorly in the past is more likely to do well in the future 
B) One investment is as good as any other because the securities' prices are correct 
C) A security's price reflects all available information about the intrinsic value of the security 
D) Security prices can be used by managers to assess their cost of capital accurately 
A) A stock that has done poorly in the past is more likely to do well in the future 
B) One investment is as good as any other because the securities' prices are correct 
C) A security's price reflects all available information about the intrinsic value of the security 
D) Security prices can be used by managers to assess their cost of capital accurately

Question 5

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 6

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 7

Suppose Barbara looks out in the morning and sees a clear sky so decides that a picnic for lunch is a good idea. Last night the weather forecast included a 100 percent chance of rain by midday but Barbara did not watch the local news program. Is Barbara's prediction of good weather at lunch time rational? Why or why not?

Accepted Answer

No, this prediction does not use rationa

Question 8

A stock's price will fall if there is ________.

Accepted Answer

A) a decrease in perceived risk 
B) an increase in the required rate of return 
C) an increase in the future sales price 
D) current dividends are high 
A) a decrease in perceived risk 
B) an increase in the required rate of return 
C) an increase in the future sales price 
D) current dividends are high

Question 9

Increased uncertainty resulting from the subprime crisis ________ the required return on investment in equity.

Accepted Answer

A) raised 
B) lowered 
C) had no impact on 
D) decreased 
A) raised 
B) lowered 
C) had no impact on 
D) decreased

Question 10

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 12 percent on the investment on this stock, thus, this stock is worth ________ for you now.

Accepted Answer

A) $100.20 
B) $108.80 
C) $107.14 
D) $132.00 
A) $100.20 
B) $108.80 
C) $107.14 
D) $132.00

Question 11

Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that ________.

Accepted Answer

A) expectations influence the behavior of participants in the economy and thus have a major impact on economic activity 
B) expectations influence only a few individuals, have little impact on the overall economy, but can have important effects on a few markets 
C) expectations influence many individuals, have little impact on the overall economy, but can have distributional effects 
D) models that ignore expectations have little predictive power, even in the short run 
A) expectations influence the behavior of participants in the economy and thus have a major impact on economic activity 
B) expectations influence only a few individuals, have little impact on the overall economy, but can have important effects on a few markets 
C) expectations influence many individuals, have little impact on the overall economy, but can have distributional effects 
D) models that ignore expectations have little predictive power, even in the short run

Question 12

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 13

The January effect refers to the fact that ________.

Accepted Answer

A) most stock market crashes have occurred in January 
B) stock prices tend to fall in January 
C) stock prices have historically experienced abnormal price increases in January 
D) the football team winning the Super Bowl accurately predicts the behavior of the stock market for the next year 
A) most stock market crashes have occurred in January 
B) stock prices tend to fall in January 
C) stock prices have historically experienced abnormal price increases in January 
D) the football team winning the Super Bowl accurately predicts the behavior of the stock market for the next year

Question 14

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 15

Stockholders are residual claimants, meaning that they ________.

Accepted Answer

A) have the first priority claim on all of a company's assets 
B) are liable for all of a company's debts 
C) will never share in a company's profits 
D) receive the remaining cash flow after all other claims are paid 
A) have the first priority claim on all of a company's assets 
B) are liable for all of a company's debts 
C) will never share in a company's profits 
D) receive the remaining cash flow after all other claims are paid

Question 16

Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

Accepted Answer

No, if this informat

Question 17

The analysts predict that the price of corporation's XYZ stock one year from now will be $20. XYZ announced that is not going to pay dividends next year. You decide that you would be satisfied to earn a 10 percent on the investment on this stock, thus, this stock is worth ________ for you now.

Accepted Answer

A) $18.00 
B) $18.18 
C) $21.10 
D) $21.00 
A) $18.00 
B) $18.18 
C) $21.10 
D) $21.00

Question 18

People have a strong incentive to form rational expectations because ________.

Accepted Answer

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 
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

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

The number and availability of discount brokers has grown rapidly since the mid-1970s. The efficient markets hypothesis predicts that people who use discount brokers ________.

Accepted Answer

A) will likely earn lower returns than those who use full-service brokers 
B) will likely earn about the same as those who use full-service brokers, but will net more after brokerage commissions 
C) are going against evidence suggesting that full-service brokers can help outperform the market 
D) are likely to outperform the market by a wide margin 
A) will likely earn lower returns than those who use full-service brokers 
B) will likely earn about the same as those who use full-service brokers, but will net more after brokerage commissions 
C) are going against evidence suggesting that full-service brokers can help outperform the market 
D) are likely to outperform the market by a wide margin

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

The theory of rational expectations, when applied to financial markets, is known as ________.

In the generalized dividend model, the current stock price is the sum of ________.

If expectations are formed adaptively, then people ________.

If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a false statement?

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

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 ________.

A stock's price will fall if there is ________.

Increased uncertainty resulting from the subprime crisis ________ the required return on investment in equity.

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 12 percent on the investment on this stock, thus, this stock is worth ________ for you now.

Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that ________.

An increase in uncertainty for the economy will ________.

The January effect refers to the fact that ________.

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

Stockholders are residual claimants, meaning that they ________.

Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

The analysts predict that the price of corporation's XYZ stock one year from now will be $20. XYZ announced that is not going to pay dividends next year. You decide that you would be satisfied to earn a 10 percent on the investment on this stock, thus, this stock is worth ________ for you now.

People have a strong incentive to form rational expectations because ________.

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

The number and availability of discount brokers has grown rapidly since the mid-1970s. The efficient markets hypothesis predicts that people who use discount brokers ________.

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

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

Financial Crises in Emerging Markets

The ISLM Model

Non-Bank Finance

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