Answered: 1.Which of the following most…

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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1.Which of the following most accurately describes the adaptive-expectations hypothesis?

A.The national debt owed to domestic and foreign investors does not include bonds held by agencies of the federal government or the Federal Reserve.

B.Economic decision-makers weigh all available evidence when they form their expectations about future economic events.

C.Economic decision-makers base their future expectations on actual outcomes observed during recent periods.

D.The indebtedness of the federal government reflects the cumulative impact of budget deficits and surpluses.

2.The index of leading economic indicators is an index composed of economic variables that tend to turn( up or down) prior to the beginning of a recession and turn (up/or down) prior to the beginning of a business

expansion.

3.Are the implications of the rational and adaptive expectations hypotheses different in the short-run?

A.No, because under both theories people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy.

B.Yes, because under adaptive expectations there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the rational expectations implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy.

C.Yes, because under rational expectations theory there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the adaptive expectations theory implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy.

D.No, because under both theories, there is a significant time lag before people come to expect the inflation and incorporate it into their decision making.

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