2. If the United States has a current account deficit with England of $1 million, and the Bank of England sells $1 million worth of pounds in the foreign exchange market, then England ______$1 million of international reserves and its monetary base ______by $1 million.

________
occurs when market participants observe returns on a security that
are larger than  


what
is justified by the characteristics of that security and take action
to quickly eliminate the  


unexploited
profit opportunity.

Rational
expectations forecast errors will on average be ________ and
therefore ________ be  


predicted
ahead of time.

If
during the past decade the average rate of monetary growth has been
5% and the average  


inflation
rate has been 5%, everything else held constant, when the Federal
Reserve announces  
that
the new rate of monetary growth will be 10%, the adaptive expectation
forecast of the  
inflation
rate is

Economists
have focused more attention on the formation of expectations in
recent years. This  


increase
in interest can probably best be explained by the recognition that

)
A monetary expansion ________ stock prices due to a decrease in the
________ and an increase  
in
the ________, everything else held constant.

Information
plays an important role in asset pricing because it allows the buyer
to more  


accurately
judge ________.

Using
the one-period
valuation model, assuming a year-end
dividend of $1.00, an expected  


sales
price of $100, and a required rate of return of 5%, the current price
of the stock would be

Stockholders
are residual claimants, meaning that they

An
inverted yield curve predicts that short-term
interest rates

A
________ yield curve predicts a future increase in inflation.