SOLVED

27.1Â Â When Are Expectations Rational? 1) If inflationary expectations are based on all available information, they are referred to as A) optimal. B) rational. C) adaptive. D) informed. 2) The primary incentive for economic agents to formulate expectations rationally is to A) increase earnings. B) increase prices. C) reduce prices. D) ensure that all expectations are realized. 3) Economic agents have an incentive to formulate expectations rationally A) because ignoring information is usually costly. B) to increase prices. C) to reduce wages. D) to ensure that all expectations are realized. 4) If an inflation forecast is based on last year’s inflation rate, it is said to be A) historical. B) rational. C) logical. D) adaptive. 5) If an inflation forecast is based on expected monetary growth, it is likely to be A) historical. B) rational. C) logical. D) adaptive. 6) Adaptive inflationary expectations are based on A) monetary growth. B) all available information. C) previous inflation rates. D) price changes in futures markets. 7) If interest rates have been increasing, adaptive expectations would predict A) that interest rates will increase. B) that interest rates will decrease. C) that inflation rates will increase. D) that inflation rates will decrease. 8) Which of the following would be included in inflationary expectations that are formed adaptively? A) Money supply growth over the past two years B) Statements made by the President of the United States C) The average inflation rate over the past three years D) A recent price agreement by oil exporting nations 9) If the consensus in securities markets is that a previous increase in the money supply will be inflationary, the likely result will be A) higher real interest rates. B) higher nominal interest rates. C) lower real interest rates. D) lower nominal interest rates. 10) If participants in securities markets believe that an announced decrease in the money supply will reduce the rate of inflation, the likely result will be A) higher real interest rates. B) higher nominal interest rates. C) lower real interest rates. D) lower nominal interest rates. 11) Adaptive expectations are “__________” according to the New Classical economists because they __________ information it is possible to use in making a forecast. A) rational; include all B) rational; exclude some C) irrational; include all D) irrational; exclude some 12) Extrapolating past values of a variable to the present is the practice of __________ expectations, which is fairly common among __________ economists. A) adaptive; New Classical B) adaptive; Keynesian C) rational; New Classical D) rational; Keynesian 13) A rightward shift of aggregate demand will raise output only if A) wages remain unchanged. B) wages rise by a lower percentage than prices. C) wages rise by the same percentage as prices. D) wages rise by a greater percentage than prices.