Question : 7.3   The Theory of Rational Expectations 1) Economists have focused more : 1373688

7.3   The Theory of Rational Expectations

1) 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

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.

2) The view that expectations change relatively slowly over time in response to new information is known in economics as

A) rational expectations.

B) irrational expectations.

C) slow-response expectations.

D) adaptive expectations.

3) 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

A) irrational.

B) rational.

C) adaptive.

D) reasonable.

4) If expectations are formed adaptively, then people

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.

5) If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%, everything else held constant, when the Federal Reserve announces that the new rate of monetary growth will be 10%, the adaptive expectation forecast of the inflation rate is

A) 5%.

B) between 5 and 10%.

C) 10%.

D) more than 10%.

6) The major criticism of the view that expectations are formed adaptively is that

A) this view ignores 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.

7) In rational expectations theory, the term “optimal forecast” is essentially synonymous with

A) correct forecast.

B) the correct guess.

C) the actual outcome.

D) the best guess.

8) If a forecast is made using all available information, then economists say that the expectation formation is

A) rational.

B) irrational.

C) adaptive.

D) reasonable.

9) If a forecast made using all available information is not perfectly accurate, then it is

A) still a rational expectation.

B) not a rational expectation.

C) an adaptive expectation.

D) a second-best expectation.

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

A) obviously formed irrationally.

B) still considered to be formed rationally.

C) formed adaptively.

D) formed equivalently.