Under the Rational Expectations Hypothesis, Which of the Following Is

question 109

Multiple Choice

Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to expansionary monetary policy?

• A)A higher general level of prices but no change in real output
• B)A higher general level of prices and an expansion in real output
• C)No change in the general level of prices and a reduction in real output
• D)No change in either the general level of prices or real output

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Definitions:

CAPM

Capital Asset Pricing Model, a model that describes the relationship between systematic risk and expected return for assets, particularly stocks.

Risk Premium

An expected return in excess of that on risk-free securities. The premium provides compensation for the risk of an investment.

Market Portfolio

An investment portfolio that theoretically includes all assets in the market, with each asset weighted according to its market capitalization.

Expected Return-Beta Relationship

A concept in the Capital Asset Pricing Model (CAPM), indicating that the expected return on an investment is related to its beta, which measures the investment's volatility relative to the market.