Under what circumstances might it be "rational" to rely on adaptive expectations?
What will be an ideal response?
Adaptive expectations are based on the past. An adaptive expectation is irrational only if there is reason to believe that it is possible to formulate a better guess. Though one can never be sure that the trends of the past will continue unaltered into the future, it may not be possible — without undue expense — to acquire enough information and understanding to justify the conclusion that the known trend will fail to persist. If the known trend has been reliable, there is no obvious reason to doubt its persistence, and there is no inexpensive way to conduct a forward-looking assessment, the adaptive expectation is rational.
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If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to
A) increase by $15 million. B) increase by $1.5 million. C) decline by $15 million. D) decline by $1.5 million.
A monopoly's economic profits are represented by:
a. (price minus marginal cost) times number of units sold. b. (price minus average cost) times number of units sold. c. (marginal revenue minus price) times number of units sold. d. (marginal cost minus price) times number of units sold.