Question 1

The regulatory capture theory suggests that the way banks and government officials looked after each other led to the financial crisis in 2008.

Accepted Answer

A) True 
 B)False

Question 2

A regulatory capture in the financial system occurs when

Accepted Answer

A) government regulators own stocks of financial institutions. 
B) the government and financial institutions become hostile to each other. 
C) government regulators and financial institutions take actions to benefit each other. 
D) the government makes loans directly to borrowers without going through the financial system. 
E) the general public bails out a financial institution. 
A) government regulators own stocks of financial institutions. 
B) the government and financial institutions become hostile to each other. 
C) government regulators and financial institutions take actions to benefit each other. 
D) the government makes loans directly to borrowers without going through the financial system. 
E) the general public bails out a financial institution.

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

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. 
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 5

Government has a role to play in dealing with some corporate governance problems because these problems can be viewed as a form of market failure.

Accepted Answer

A) True 
 B)False

Question 6

One way in which problems of moral hazard and adverse selection can be limited is through the use of profit sharing agreements, whereby managers and employees are given a share of the profits earned by the firm. That way the agents of the firms have a financial stake in the firm's success, and hence have their interests aligned with the principals.

Accepted Answer

A) True 
 B)False

Question 7

A bond's yield is the fixed amount that the borrower agrees to pay the bondholder each year.

Accepted Answer

A) True 
 B)False

Question 8

Firms can raise funds by issuing stocks and bonds.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) individuals will choose indifferently between the stock and the bank account. 
B) there will be an excess supply of the stock and its price will fall. 
C) risk-averse individuals will prefer the stock. 
D) there will be an excess supply of the stock and its price will rise. 
E) there will be an excess demand for the stock and its price will rise. 
A) individuals will choose indifferently between the stock and the bank account. 
B) there will be an excess supply of the stock and its price will fall. 
C) risk-averse individuals will prefer the stock. 
D) there will be an excess supply of the stock and its price will rise. 
E) there will be an excess demand for the stock and its price will rise.

Question 10

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

Accepted Answer

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. 
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 11

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

Accepted Answer

A) True 
 B)False

Question 12

A difference between financial capital and physical capital is that

Accepted Answer

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. 
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 13

The discount rate is commonly measured by the

Accepted Answer

A) stock market returns. 
B) rate of inflation. 
C) interest rate. 
D) unemployment rate. 
E) rate of economic growth. 
A) stock market returns. 
B) rate of inflation. 
C) interest rate. 
D) unemployment rate. 
E) rate of economic growth.

Question 14

In insurance and other markets, adverse selection is known as a situation in which the people who choose to buy insurance will be the riskiest group in the population.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

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

Question 16

A higher interest rate implies a higher implicit rental price.

Accepted Answer

A) True 
 B)False

Question 17

Calculate the maximum price that should be paid for a bond with a face value of $100, a coupon of $12, and a maturity date of three years from now if the prevailing interest rate is 15 percent.

Accepted Answer

The answer of Calculate the maximum price that should be...

Question 18

Gretchen Morgenson and Joshua Rosner argued that the main reason for the most recent financial crisis was that

Accepted Answer

A) the Federal Reserve had too much control over the financial system. 
B) no one could see the risk in the financial market at that time. 
C) there were too many banks and other financial institutions in the United States. 
D) there were too many government regulators. 
E) government regulators were being "captured" by banks. 
A) the Federal Reserve had too much control over the financial system. 
B) no one could see the risk in the financial market at that time. 
C) there were too many banks and other financial institutions in the United States. 
D) there were too many government regulators. 
E) government regulators were being "captured" by banks.

Question 19

The equilibrium price of capital

Accepted Answer

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. 
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 20

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

Accepted Answer

A) True 
 B)False

Exam 16: Capital and Financial Markets

The regulatory capture theory suggests that the way banks and government officials looked after each other led to the financial crisis in 2008.

A regulatory capture in the financial system occurs when

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

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

Government has a role to play in dealing with some corporate governance problems because these problems can be viewed as a form of market failure.

A bond's yield is the fixed amount that the borrower agrees to pay the bondholder each year.

Firms can raise funds by issuing stocks and bonds.

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

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

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

A difference between financial capital and physical capital is that

The discount rate is commonly measured by the

In insurance and other markets, adverse selection is known as a situation in which the people who choose to buy insurance will be the riskiest group in the population.

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

A higher interest rate implies a higher implicit rental price.

Calculate the maximum price that should be paid for a bond with a face value of $100, a coupon of $12, and a maturity date of three years from now if the prevailing interest rate is 15 percent.

Gretchen Morgenson and Joshua Rosner argued that the main reason for the most recent financial crisis was that

The equilibrium price of capital

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

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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