Which of the Following Statements Is True of Rational Expectations

question 20

Multiple Choice

Which of the following statements is true of rational expectations?

• A)Rational expectations forecasts are always correct.
• B)For a trader with rational expectations, the expectation of an asset's price equals the optimal price forecast.
• C)If traders have rational expectations, any announcement by a company will have an effect on its stock price, even if the market was already aware of the facts being announced.
• D)If a trade really has rational expectations, he or she was always earn a greater than normal return on his or her financial portfolio.

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Definitions:

Demand Curve

A graph showing the relationship between the price of a good and the quantity demanded, typically downward sloping to the right.

Corporate Hierarchy

A structure in corporations that defines the levels of authority, roles, and responsibilities from top management to lower-level employees.

Natural Monopoly

A natural monopoly occurs when a single firm can supply the entire market at a lower cost than could be achieved by multiple firms due to economies of scale.

Economies of Scale

The cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.