Deck 16: Capital and Financial Markets

Question 1

The federal government borrows funds by obtaining bank loans.

Answer 1

False

Question 2

Which of the following is an example of an equity contract?

A) Mortgage
B) Dividends
C) Stocks
D) Interest
E) Bonds

Answer 2

Stocks

Question 3

The stock of physical capital in the economy consists of all of the

A) buildings and equipment used by private firms and the government, plus residential housing.
B) buildings and equipment used by private firms.
C) buildings, equipment, and financial assets of private firms.
D) buildings and equipment used by private firms and the government.
E) buildings and equipment used by private firms and the government, not including schools and the military.

Answer 3

buildings and equipment used by private firms and the government, plus residential housing.

Question 4

In economics, physical capital is the same as financial capital.

Question 5

The stock of physical capital in the economy

A) depends only on the level of investment by private firms and the government, and the number of residential housing units.
B) None of these answers is correct.
C) depends only on the level of investment by private firms and the government.
D) depends only on the level of investment by private firms and the number of residential housing units.
E) depends only on the level of investment by private firms.

Question 6

A difference between financial capital and physical capital is that

A) financial capital is not necessary.
B) financial capital never loses its value.
C) physical capital cannot be traded.
D) physical capital does not lose its value.
E) financial capital cannot be used to produce goods or services.

Question 7

Which of the following is not an example of physical capital?

A) Building
B) Office furniture
C) Delivery trucks
D) Money
E) Computer

Question 8

A debt contract usually specifies

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 9

Residential housing is considered physical capital only if it is used for business purposes.

Question 10

Equity contracts of a corporation represent

A) ownership.
B) debt.
C) loans.
D) the amount of market power.
E) how much the corporation owes the government.

Question 11

Which of the following is an example of physical capital?

A) A checking deposit
B) A car loan
C) A firm's stock shares
D) A firm's bond
E) A new truck

Question 12

Which of the following is an example of financial capital?

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

Question 13

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

Question 14

When capital loses value over time because of use and wear, we call this

A) depreciation.
B) wear and tear.
C) creative destruction.
D) capital utilization.
E) decapitalization.

Question 15

Depreciation occurs when

A) machines wear out.
B) factories get old.
C) capital is abandoned.
D) production lines are shut down.
E) capital is sold.

Question 16

Depreciation of physical capital occurs because it

A) is no longer wanted.
B) cannot be fixed.
C) is not made well.
D) gets old.
E) wears out.

Question 17

Equity and debt are two different names for the same thing.

Question 18

Physical capital is a good used to produce other goods.

Question 19

Which of the following is the best example of a debt contract?

A) Bank loans and stocks
B) Bank loans
C) Bank loans and bonds
D) Bank loans, bonds, and stocks
E) Stocks

Question 20

Which of the following is not an example of financial capital?

A) IBM bonds
B) IBM stocks
C) Automatic teller machines
D) Government bonds
E) Corporate cash balances

Question 21

The equilibrium rental price of capital is determined by the

A) market's marginal revenue product of capital.
B) firm's marginal revenue product of capital.
C) firm's demand for capital.
D) market's demand for and supply of capital.
E) market's demand for capital.

Question 22

The demand for capital is

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 23

Exhibit 16-1
Refer to Exhibit 16-1. Suppose that the price of tools is $32. Then a profit-maximizing firm will buy a total of

A) 1 unit.
B) 2 units.
C) 3 units.
D) 4 units.
E) 5 units.

Question 24

What is the difference between a debt contract and an equity contract?

Question 25

The demand for capital is a derived demand, as is the demand for labor.

Question 26

The marginal revenue product of capital is the

A) marginal product of capital multiplied by the price of capital.
B) amount revenue changes when one more unit of capital is used.
C) total cost of capital divided by the quantity of capital.
D) amount profit is reduced by capital purchases.
E) product of the price of capital and the quantity of capital.

Question 27

In a competitive market, the rental price of capital equals its marginal revenue product.

Question 28

The demand curve for capital shows

A) the total quantity of capital demanded at each price of the good produced.
B) marginal revenue product of capital increasing as more capital is used.
C) marginal revenue product of capital increasing as the price of capital increases.
D) the marginal revenue product at each price of the good produced.
E) the total quantity of capital demanded at each price of capital.

Question 29

If the marginal revenue product of capital for a profit-maximizing firm is $800 and the price of capital is $600, then the firm

A) has just the right amount of capital.
B) should decrease the amount of other inputs its production process requires.
C) should increase the amount of other inputs its production process requires.
D) should purchase or rent more capital.
E) should reduce the amount of capital.

Question 30

Exhibit 16-1
Refer to Exhibit 16-1. The marginal revenue product for the sixth unit of tools is

A) $0.
B) $16.
C) $32.
D) $64.
E) $240.

Question 31

In a competitive market, the rental price of capital

A) is more than the marginal revenue product of capital.
B) is less than the marginal revenue product of capital.
C) equals the marginal revenue product of capital.
D) equals the average cost of capital.
E) is more than the marginal cost of capital.

Question 32

A profit-maximizing firm will rent or purchase a quantity of capital such that the

A) marginal revenue product of labor is equal to the price of capital.
B) marginal revenue product of capital is greater than the price of capital.
C) marginal revenue product of capital is equal to the price of capital.
D) marginal revenue is equal to the marginal cost.
E) marginal revenue product of capital is greater than or equal to the price of capital.

Question 33

The equilibrium price of capital

A) is not affected by a government subsidy on the rental of capital by firms.
B) decreases if the government subsidizes the rental of capital by firms because the demand curve for capital shifts to the left.
C) increases if the government subsidizes the rental of capital by firms because the demand curve for capital shifts to the right.
D) increases if the government subsidizes the rental of capital by firms because the supply curve for capital shifts to the left.
E) decreases if the government subsidizes the rental of capital by firms because the supply curve for capital shifts to the right.

Question 34

The price of a good with a vertical market supply is called

A) pure profit.
B) economic rent.
C) pure price.
D) fixed-supply price.
E) gouged price.

Question 35

What is the difference between financial capital and physical capital?

Question 36

A firm needs to raise financial capital in order to purchase some new physical capital to increase production. Name three ways in which the firm could raise the financial capital. Which is the best choice?

Question 37

The profit-maximizing principle that marginal revenue product equals the price of the input applies

A) to any factor of production.
B) only in the short run.
C) to capital only.
D) to labor and capital only.
E) to labor only.

Question 38

If the marginal revenue product of capital for a profit-maximizing firm is $500 and the price of capital is $300, then

A) the firm will need to hire more capital in order to maximize profit.
B) the firm is not maximizing profit.
C) Not enough information is given to support the any of the choices.
D) the firm will need to hire less capital in order to maximize profit.
E) the firm is maximizing profit.

Question 39

If a new tax is placed on a good with a vertical supply curve, the price paid by demanders

A) does not change.
B) decreases by the amount of the tax.
C) decreases by an uncertain amount.
D) increases by the amount of the tax.
E) increases by an uncertain amount.

Question 40

The demand curve for capital shows that when the price of capital falls,

A) the quantity of capital demanded does not change.
B) the quantity of capital demanded decreases.
C) the quantity of capital demanded increases.
D) marginal revenue product of capital increases.
E) marginal revenue falls.

Question 41

When a firm pays cash for a piece of equipment, the implicit rental price is zero.

Question 42

If the marginal revenue product is less than the price of an input, then a profit-maximizing firm will increase the amount of the input.

Question 43

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

Question 44

When a firm owns its capital,

A) depreciation is the only capital cost.
B) the marginal product of capital must be zero.
C) it still pays an implicit rent.
D) firms that must rent capital cannot compete.
E) the capital is considered free.

Question 45

Explain how a firm decides how much capital to hire or purchase.

Question 46

Which of the following situations would increase the demand for capital?

A) An improvement in technology increases the marginal product of capital.
B) Capital wears out 50 percent faster than it used to.
C) The Fed increases the interest rate.
D) Sales are higher than anticipated, so the firm has enough cash on hand that it can afford to buy the new equipment outright.
E) The Fed decreases the interest rate.

Question 47

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

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 48

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

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

Question 49

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

Question 50

A tax on renting capital equipment will always decrease the quantity of capital supplied.

Question 51

A profit-maximizing firm will select all inputs so that the marginal revenue product is equal to the price of the input.

Question 52

If the implicit rental price of an airliner is $200,000 per year, the interest rate is 5 percent, and depreciation is $60,000 per year, then the purchase price of the airliner is

A) $1,300,000.
B) $4,000,000.
C) $2,800,000.
D) $4,060,000.
E) $5,200,000.

Question 53

Which of the following statements about the housing market is $\textbf{ not }$ true?

A) The demand curve for housing is negatively sloped.
B) Many experts believe that one of the factors contributing to the housing bust of 2006 was that interest rates had been too high since the year 2000.
C) The quantity of housing demanded is negatively related to the rental price of housing.
D) For many people, the house they live in is the largest capital item they rent or own.
E) All of these are true.

Question 54

Firms use physical capital markets to raise funds for expansion.

Question 55

Draw a diagram of a market in which economic rent occurs. Be sure to label the rent in the diagram.

Question 56

The implicit rental price of a piece of capital

A) depends on the interest rate only if the firm must borrow money.
B) depends on the interest rate and depreciation.
C) is the same as the rental price of a piece of capital.
D) depends on the interest rate only.
E) depends on the opportunity cost of the purchase if the firm must borrow money.

Question 57

If the interest rate at which a firm can borrow or lend is 10 percent, then the firm will own

A) all units of capital with a marginal revenue product below 10 percent.
B) all units of capital with a marginal revenue product above 10 percent.
C) all units of capital with an average revenue product below 10 percent.
D) all units of capital with an average revenue product above 10 percent.
E) no capital at all.

Question 58

The table below contains information about a firm's marginal revenue product of capital. Suppose the rental price of capital is $425,000. How many units should the firm hire to maximize profit?

A) The firm should hire 3,000 units or, if fractional units are possible, less than 4,000 but more than 3,000 units.
B) The firm should hire 4,000 units or, if fractional units are possible, less than 5,000 but more than 4,000 units.
C) The firm should hire 5,000 units.
D) The firm should hire 6,000 units or, if fractional units are possible, less than 7,000 but more than 6,000 units.
E) The firm should hire 7,000 units or, if fractional units are possible, less than 6,000 but more than 7,000 units.

Question 59

A higher interest rate implies a higher implicit rental price.

Question 60

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

Question 61

The formula that gives the relationship between the price and the yield for long-term bonds, where P is the price of the bond, R is the bond coupon, and i is the yield, is

A)
B)
C)
D) P = R $\times$ i
E) R = P + i

Question 62

If a stock suffers a capital loss for the year, then the annual return from holding the stock will be negative.

Question 63

The annual return from holding a stock is the

A) increase in the price of the stock for the year plus the dividends paid by the firm for the year.
B) dividends paid by the firm for the year minus the increase in the price of the stock for the year.
C) increase in the price of the stock for the year.
D) increase in the price of the stock for the year minus the dividends paid by the firm for the year.
E) dividends paid by the firm for the year.

Question 64

The market demand for housing is the result of adding all of the relevant individual demand curves.

Question 65

The yield on a bond is

A) the amount of money the borrower agrees to pay the bondholder each year divided by the face value of the bond.
B) the amount of money the borrower agrees to pay the bondholder each year.
C) the amount of money the borrower agrees to pay the bondholder each year divided by the current market price of the bond.
D) the amount of principal that will be paid back when the bond matures.
E) fixed for the life of the bond.

Question 66

If the price of a stock rises from $80 to $100 over the course of a year and the dividend paid is $5, the capital gain is

A) 15 percent.
B) 31.25 percent.
C) $25.
D) $20.
E) 6.25 percent.

Question 67

The amount of principal that will be paid back when a bond matures is called the

A) dividend.
B) yield.
C) coupon.
D) maturity value.
E) face value.

Question 68

The return on a stock is equal to its dividend plus the change in stock price.

Question 69

An increase in stock price is called

A) corporate earnings.
B) a capital gain.
C) basic income.
D) a rate of return.
E) a dividend yield.

Question 70

On the maturity date, the firm or government that issued a bond must pay

A) the face value of the bond as well as the coupon.
B) the face value of the bond, the coupon, and a dividend.
C) the face value of the bond only.
D) the coupon only.
E) a dividend.

Question 71

Many experts think a major reason for the housing boom during the years leading up to the housing bust in 2006 was that mortgage interest rates were very low.

Question 72

The price-earnings ratio is the price of a good divided by the average profit per unit.

Question 73

The amount of money the borrower agrees to pay the bondholder each year is called the

A) interest rate.
B) coupon.
C) dividend.
D) yield.
E) face value.

Question 74

What happens to the price of a bond with a $100 face value and an infinite maturity date when interest rates rise from 5 percent to 10 percent and the coupon paid on the bond is $20?

A) The price falls by $100.
B) The price rises by $200.
C) The price rises by $100.
D) The price falls by $1.
E) The price falls by $200.

Question 75

If the price of a stock is $50, the dividend is $5, and the stock price has risen $2 in the past year, the dividend yield is

A) $5.
B) 10 percent.
C) 4 percent.
D) 7 percent.
E) $7.

Question 76

The returns on stocks is called interest.

Question 77

Which of the following is true?

A) The bond yield is fixed for the life of the bond, but the bond price can vary.
B) The bond yield and bond price are positively related.
C) The bond price is fixed for the life of the bond, but the bond yield can vary.
D) The bond yield and the bond price are inversely related.
E) The bond yield and bond price are both fixed for the life of the bond.

Question 78

Firms can raise funds by issuing stocks and bonds.

Question 79

The dividend yield for a stock is the dividend divided by the price of the stock.

Question 80

The quantity of housing demanded is positively related to the rental price of housing.