Ecn 135
Problem set #5
Due Nov. 14th

1) An expectation may fail to be rational if

relevant information was not available at the time the forecast is made.
relevant information is available but ignored at the time the forecast is made.
information changes after the forecast is made.
information was available to insiders only.

2) According to rational expectations theory, forecast errors of expectations

are more likely to be negative than positive.
are more likely to be positive than negative.
tend to be persistently high or low.
are unpredictable.

3) The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market

It will tend to go unnoticed for some time.
It will be quickly eliminated.
financial analysts are your best source of this information
prices will reflect the unexploited profit opportunity

4) A phenomenon closely related to market overreaction is

The random walk.
The small-firm effect.
The January effect.
Excessive volatility.

5) The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee?

Philadelphia
Boston
San Francisco
New York

6) Which of the following is an entity of the Federal Reserve System?

U.S. Treasury Secretary
The FOMC
The Comptroller of the Currency
The FDIC

Chapter 7, questions #9 and #15
9. "If stock prices did not follow a random walk, there would be unexploited profit opportunities in the market." Is this tatement true, false, or uncertain? Explain your answer.

False. Efficient market hypothesis says that stock prices should follow random walk - that is, future changes in stock prices should be unpredictable. If it is not random walk, then prices are predictable and people will exploit any unexploited profit opportunities even easier.

15. "If most participants in the stock market do not follow what is happening to the monetary aggregates, prices of common stocks will not fully reflect iinormation about them." Is this statement true, false, or uncertain? Explain your answer.

Chapter 12 question #4
4. In what ways can the regional Federal Reserve banks influence the conduct of monetary policy?
a. Their directors "establish" the discount rate (although the discount rate in each district is reviewed and determined by the Board of Governors).

b. They decide which banks, member and nonmember alike, can obtain discount loans from the Federal Reserve bank.

c. Their directors select one commerical banker from each bank's distric to serve on the Federal Advisory Council, which consults with the Board of Governors and provides information that helps in the conduct of monetary policy.

d. Five of the twelve bank presidents each have a vote in the Federal Open Market Committee, which directs open market operations (the purchase and sale of government securities that affect both interest rates and the amount of reserves in teh banking system). As explained in the Fed box, "The Special Role of the Ffederal Reserve Bank of New York," the president of the New York Fed always has a vote inthe FOMC, making it the most important of the banks; the other four votes allocated to the district banks rotate annually among the remaining eleven presidents.