Question 1

The returns on stocks is called interest.

Accepted Answer

A) True 
 B)False  False

Question 2

When the interest rate is 10 percent, what is the price of a bond that matures in one year, has a $300 face value, and has a coupon of $20 per year?

Accepted Answer

A) $93.24 
B) $266.11 
C) $272.72 
D) $290.90 
E) $282.64 
A) $93.24 
B) $266.11 
C) $272.72 
D) $290.90 
E) $282.64 D

Question 3

Which of the following is an example of financial capital?

Accepted Answer

A) A new factory 
B) Office furniture 
C) A company bond 
D) Computer equipment 
E) A new truck 
A) A new factory 
B) Office furniture 
C) A company bond 
D) Computer equipment 
E) A new truck C

Question 4

As the risk of an investment increases, the expected return must also increase in order for risk-averse individuals to participate in the investment.

Accepted Answer

A) True 
 B)False

Question 5

Refer to the table below. A particular stock market investment strategy has the following possible outcomes:

Accepted Answer

The answer of Refer to the table below. A particular...

Question 6

Why do economists say that firms that own capital pay rent?

Accepted Answer

Economists recognize opportunity cost. A

Question 7

Because capital is a fixed input, the marginal revenue product of capital remains fixed as capital changes.

Accepted Answer

A) True 
 B)False

Question 8

Applied to the housing market, the implicit rental price concept states that

Accepted Answer

A) it is always better to own than to rent a house. 
B) it is always better to rent than to own a house. 
C) the implicit rental price will equal the interest rates on the mortgage (the loan on the house) plus the amount of depreciation on the house during the year. 
D) taxes will always be lower when renting a house. 
E) None of these. 
A) it is always better to own than to rent a house. 
B) it is always better to rent than to own a house. 
C) the implicit rental price will equal the interest rates on the mortgage (the loan on the house) plus the amount of depreciation on the house during the year. 
D) taxes will always be lower when renting a house. 
E) None of these.

Question 9

Suppose a coupon of $15 is paid on a bond that matures indefinitely and has a $200 face value. If the interest rate is 9 percent, what is the price of the bond?

Accepted Answer

A) $183.49 
B) There is not enough information provided to answer this question. 
C) $166.67 
D) $72.22 
E) $22.22 
A) $183.49 
B) There is not enough information provided to answer this question. 
C) $166.67 
D) $72.22 
E) $22.22

Question 10

If the stock market is efficient, then stockholders

Accepted Answer

A) learn new information slowly. 
B) never understand the market. 
C) use up all available information to predict stock prices. 
D) always speculate on stock prices. 
E) are always correct about future stock movements. 
A) learn new information slowly. 
B) never understand the market. 
C) use up all available information to predict stock prices. 
D) always speculate on stock prices. 
E) are always correct about future stock movements.

Question 11

The demand for capital is

Accepted Answer

A) a final demand because it is determined by market supply and demand. 
B) a final demand because it is unrelated to any other market. 
C) a derived demand because it is financially funded by other markets. 
D) a derived demand because it depends on the production of goods. 
E) the same as the demand in any other market. 
A) a final demand because it is determined by market supply and demand. 
B) a final demand because it is unrelated to any other market. 
C) a derived demand because it is financially funded by other markets. 
D) a derived demand because it depends on the production of goods. 
E) the same as the demand in any other market.

Question 12

Economists generally believe that as risk increases, investment becomes more interesting and people require lower rates of return.

Accepted Answer

A) True 
 B)False

Question 13

A debt contract usually specifies

Accepted Answer

A) that only the original lender can collect the payments. 
B) how much of a company is owned by the lender. 
C) which assets a lender will receive if a company defaults. 
D) a specific amount of money owed and the rate of interest. 
E) the rights that the lender has to a company. 
A) that only the original lender can collect the payments. 
B) how much of a company is owned by the lender. 
C) which assets a lender will receive if a company defaults. 
D) a specific amount of money owed and the rate of interest. 
E) the rights that the lender has to a company.

Question 14

From 1987 to 2010, the U.S. stock market has delivered positive annual returns every year.

Accepted Answer

A) True 
 B)False

Question 15

Suppose a stock has the same expected rate of return as a bank account. Then the price of the stock will

Accepted Answer

A) rise and the expected rate of return will decrease. 
B) fall and the interest rate will decrease. 
C) rise and the expected rate of return will increase. 
D) fall and the expected rate of return will increase. 
E) fall and the expected rate of return will decrease. 
A) rise and the expected rate of return will decrease. 
B) fall and the interest rate will decrease. 
C) rise and the expected rate of return will increase. 
D) fall and the expected rate of return will increase. 
E) fall and the expected rate of return will decrease.

Question 16

The equilibrium rental price of capital is determined by the supply of and demand for capital goods.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following best describes a risk-averse individual?

Accepted Answer

A) He would rather spend all his money than risk it in investments. 
B) He would rather put $100 in a bank account earning 10 percent than in a one-year government bond earning 10 percent. 
C) He would rather have $10 in his pocket than gamble on a coin toss in which heads yields $20 and tails yields nothing. 
D) He would rather put $100 in a bank at 10 percent interest than in a stock with a 10-percent dividend and 50-50 chance of a 25-percent increase or decrease in the value of the stock. 
E) He does not trust banks. 
A) He would rather spend all his money than risk it in investments. 
B) He would rather put $100 in a bank account earning 10 percent than in a one-year government bond earning 10 percent. 
C) He would rather have $10 in his pocket than gamble on a coin toss in which heads yields $20 and tails yields nothing. 
D) He would rather put $100 in a bank at 10 percent interest than in a stock with a 10-percent dividend and 50-50 chance of a 25-percent increase or decrease in the value of the stock. 
E) He does not trust banks.

Question 18

In the fall of 2008, the U.S. Treasury and the Federal Reserve together attempted to deal with the collapse of major financial institutions through

Accepted Answer

A) actions of the Federal Open Market Committee. 
B) the Troubled Assets Relief Program. 
C) the American Recovery and Reinvestment Act. 
D) a $500 tax rebate to individual taxpayers. 
E) None of these. 
A) actions of the Federal Open Market Committee. 
B) the Troubled Assets Relief Program. 
C) the American Recovery and Reinvestment Act. 
D) a $500 tax rebate to individual taxpayers. 
E) None of these.

Question 19

A risk-averse person will

Accepted Answer

A) never take a risk. 
B) always choose the investment option with the least risk. 
C) always choose the investment option with the highest expected return. 
D) choose a risky investment if the expected return is high enough. 
E) never gamble. 
A) never take a risk. 
B) always choose the investment option with the least risk. 
C) always choose the investment option with the highest expected return. 
D) choose a risky investment if the expected return is high enough. 
E) never gamble.

Question 20

A construction firm can buy a bulldozer for $200,000. Gasoline costs $500 per month, the interest rate is 15 percent, and depreciation is $25,000 per year. If the bulldozer is purchased, the monthly implicit rent will be

Accepted Answer

A) $2,500. 
B) $4,583. 
C) $32,083. 
D) $5,083. 
E) $32,583. 
A) $2,500. 
B) $4,583. 
C) $32,083. 
D) $5,083. 
E) $32,583.

Exam 16: Capital and Financial Markets

The returns on stocks is called interest.

When the interest rate is 10 percent, what is the price of a bond that matures in one year, has a $300 face value, and has a coupon of $20 per year?

Which of the following is an example of financial capital?

As the risk of an investment increases, the expected return must also increase in order for risk-averse individuals to participate in the investment.

Refer to the table below. A particular stock market investment strategy has the following possible outcomes:

Why do economists say that firms that own capital pay rent?

Because capital is a fixed input, the marginal revenue product of capital remains fixed as capital changes.

Applied to the housing market, the implicit rental price concept states that

Suppose a coupon of $15 is paid on a bond that matures indefinitely and has a $200 face value. If the interest rate is 9 percent, what is the price of the bond?

If the stock market is efficient, then stockholders

The demand for capital is

Economists generally believe that as risk increases, investment becomes more interesting and people require lower rates of return.

A debt contract usually specifies

From 1987 to 2010, the U.S. stock market has delivered positive annual returns every year.

Suppose a stock has the same expected rate of return as a bank account. Then the price of the stock will

The equilibrium rental price of capital is determined by the supply of and demand for capital goods.

Which of the following best describes a risk-averse individual?

In the fall of 2008, the U.S. Treasury and the Federal Reserve together attempted to deal with the collapse of major financial institutions through

A risk-averse person will

A construction firm can buy a bulldozer for $200,000. Gasoline costs $500 per month, the interest rate is 15 percent, and depreciation is $25,000 per year. If the bulldozer is purchased, the monthly implicit rent will be

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model

The Demand Curve and the Behavior of Consumers

The Supply Curve and the Behavior of Firms

The Efficiency of Markets

Costs and the Changes at Firms Over Time

The Rise and Fall of Industries

Monopoly

Product Differentiation, Monopolistic Competition, and Oligopoly

Antitrust Policy and Regulation

Labor Markets

Taxes, Transfers, and Income Distribution

Public Goods, Externalities, and Government Behavior

Macroeconomics: the Big Picture

Measuring the Production, Income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

The Economic Fluctuations Model

Using the Economic Fluctuations Model

Fiscal Policy

Monetary Policy

Economic Growth Around the World

International Trade

International Finance

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