The Major Criticism of the View That Expectations Are Formed

question 30

Multiple Choice

The major criticism of the view that expectations are formed adaptively is that ________.

• A) this view ignores the fact 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

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Definitions:

Cash Inflows

Funds entering a business from various sources like sales, financing, and investments.

Minimum Required Rate

The lowest rate of return or yield that an investor expects or requires from an investment.

Internal Rate of Return

The discount rate at which the net present value of all cash flows (both positive and negative) from a project or investment equals zero.

Rate of Return

A measure of the profitability and efficiency of an investment, expressed as a percentage of the original investment.