Question 1

Refer to the following figure when answering the next two questions.
Figure 17.2: Dow Jones Industrial Average: 2000-2012 
 (Source: Federal Reserve Economic Data, St. Louis Federal Reserve) 
-Your uncle asks you to explain stock prices based on the financial capital arbitrage equation. He shows you the graph shown in Figure 17.2. He asks you to explain the cause in the rise of stock prices for the years 2002-2006. What do you tell him?

Accepted Answer

A)   "As the DJI rises, there are financial capital gains that drive up stock prices."
B)   "The rise in the DJI implies there was an incentive for Congress to increase corporate tax rates, which would have led to falling capital investment. With less capital, stock prices rise."
C)   "The rising DJI leads to falling dividend payments, which would lead to a decline in physical capital accumulation. With less capital available, the marginal product of capital rises, leading to higher stock prices."
D)   "A rising DJI decreases the MPK."
E)   "Rising capital gains, as shown in the figure, have no impact on stock prices."F) A) and B)
G) B) and E) A

Question 2

Refer to the following figure when answering  
Figure 17.3: Change in Private Inventories: 1980-2012 
 (Source: Federal Reserve Economic Data, St. Louis Federal Reserve) 
-Consider Figure 17.3, which shows changes in private inventories. Which of the following (approximate)  dates is likely to be a period of recession? Given your analysis, inventories are:

Accepted Answer

A)   1980; countercyclical
B)   1997; procyclical
C)   2008; countercyclical
D)   2001; procyclical
E)   2001; countercyclicalF) None of the above
G) A) and B)

Question 3

One reason we are interested in investment is its:

Accepted Answer

A)   contribution to higher interest rates
B)   negative impact on current consumption
C)   relationship to exchange rate markets
D)   impact on financial markets
E)   link to long-term economic growthF) A) and E)
G) A) and D)

Question 4

You decide to move to the mountains of Colorado and want to know what would be a good offering price on a home, but you know you will only own it a year. Fortunately, you are armed with the simple residential investment equation. You have the following information: the real interest rate is 4 percent; the depreciation rate of homes is 5 percent; average rent is $1,000; there is no expected capital gain; and you will have a 20 percent down payment. You offer the owner, rounding to the nearest dollar:

Accepted Answer

A)   $25,000
B)   $125,000
C)   $4,167
D)   $17,241
E)   $50,000F) B) and C)
G) D) and E)

Question 5

The company that was one of the first adopters of supply-chain management was:

Accepted Answer

A)   Exxon
B)   Albertson's
C)   IBM
D)   Walmart
E)   AppleF) A) and B)
G) A) and C)

Question 6

Figure 17.4: Capital Arbitrage 
-Consider Figure 17.4. Write down the equation for the user cost of capital. Discuss what happens to the user cost in the following scenarios:
a. the corporate income tax rises;
b. the real interest rises;
c. there is an increase in capital gains.
Graphically show what happens to capital investment.

Accepted Answer

The user cost is: $u c = \frac { R + \bar { d } - \Delta P _ { k } / P _ { k } } { 1 - \tau }$ .
a. $\tau \uparrow$ : Raises the user cost. In the figure above, the user cost shifts from $u c _ { 1 } \rightarrow u c _ { 2 }$ and there is less capital investment.
b. $R \uparrow$ : Raises the user cost. In the figure above, the user cost shifts from $u c _ { 1 } \rightarrow u c _ { 2 }$ and there is less capital investment.
c. $\left( \Delta p _ { k } / p _ { k } \right) \uparrow$ : Lowers the user cost. In the figure above, the user cost shifts from $u c _ { 2 } \rightarrow u c _ { 1 }$ and there is more capital investment.

Question 7

The arbitrage condition for capital shows that returns to a bank account are equal to the user cost of capital.

Accepted Answer

A) True 
 B)False

Question 8

In the growth model, we assumed the savings rate was given by ________, which is exogenous, but from the chapter on investment, we know it is equal to ________.

Accepted Answer

A)   the saving rate; the growth rate of capital
B)    sˉ;sˉ×3×uc\bar { s } ; \bar { s } 	imes 3 	imes u csˉ;sˉ×3×uc 
C)    sˉ;gk+dˉ3uc\bar { s } ; \frac { g _ { k } + \bar { d } } { 3 u c }sˉ;3ucgk​+dˉ​ 
D)   a savings shock;  mˉbˉ\bar { m } \bar { b }mˉbˉ 
E)   total factor productivity;  gk+dˉg _ { k } + \bar { d }gk​+dˉF) B) and C)
G) B) and E)

Question 9

The conclusion of a study by Steven Davis and James Kahn is that:

Accepted Answer

A)   inflation is super-super neutral in the long run
B)   the saving rate in the Solow model does not contribute to economic growth
C)   the Phillips curve is flat
D)   the output gap is consistently more volatile than most economists and policymakers believe
E)   improvements in inventory management have reduced macroeconomic volatilityF) All of the above
G) A) and D)

Question 10

If a stock is just as likely to move up or down, it:

Accepted Answer

A)   is highly correlated
B)   follows a random walk
C)   has a high standard deviation
D)   is stationary
E)   is highly volatileF) A) and D)
G) A) and B)

Question 11

From the residential arbitrage equation, a rise in the down payment will reduce the price of the house, all else equal, while an increase in the real interest rate will reduce the house price, all else equal.

Accepted Answer

A) True 
 B)False

Question 12

In the equation  R×pk=MPK+Δpk,ΔpkR 	imes p _ { k } = M P K + \Delta p _ { k } , \Delta p _ { k }R×pk​=MPK+Δpk​,Δpk​  is the ________ and  pkp _ { k }pk​ 
Is the ________.

Accepted Answer

A)   stock return; bond return
B)   return from a bank account; return to owning capital
C)   capital gain; initial price of capital
D)   real interest rate; rate of return to capital
E)   opportunity cost of capital; user cost of capital F) A) and D)
G) All of the above

Question 13

Refer to the following figure when answering  
Figure 17.1: Capital Arbitrage 
-Consider Figure 17.1. If there is an increase in the marginal product of capital, then curve ________ would shift to curve ________.

Accepted Answer

A)   d; c
B)   b; a
C)   c; d
D)   a; b
E)   Not enough information is given.F) None of the above
G) B) and D)

Question 14

According to the financial asset arbitrage equation, a rise in the capital gain for a stock implies a rise in the real interest rate, all else equal.

Accepted Answer

A) True 
 B)False

Question 15

If the marginal product of capital is 3 percent, the real interest rate is 4 percent, and the capital depreciation rate is 10 percent, what is the equilibrium stock price?

Accepted Answer

A)   $1.33
B)   $83.33
C)   $25.00
D)   $0.18
E)   Not enough information is given.F) A) and E)
G) C) and D)

Question 16

For the profit-maximizing firm, if the real interest rate is less than the marginal product of capital, the firm should invest in more capital.

Accepted Answer

A) True 
 B)False

Question 17

Write down the equation for the stock price. Use this equation to answer the following:
a. Your stock broker calls to tell you she has a great deal on a stock. She gives you the following information: the real interest rate is 4 percent, the capital gain on this stock is 3.5 percent, and it pays $2.50 in dividends. How much should you pay for this stock?
b. The next day she calls back and tells you about another stock that is for sale (i.e., the market price) for $75. She does not know the dividend growth but she does know the dividend payment, $0.35 per share, and the real interest rate, 4 percent. For you to buy this stock, how much annual dividend growth should you expect at that price?
c. A hot stock tip comes from a friend. The price of the stock is $50, the dividend gain is 2.5 percent, and you know the real interest rate from your previous two discussions with your broker. How much of a dividend payment will you want?

Accepted Answer

The stock price is

.
a. From the above ...

Question 18

If the real interest rate is 4 percent, the depreciation rate is 10 percent, the tax rate is 0 percent, and capital gain is 1 percent, the user cost of capital is 13 percent.

Accepted Answer

A) True 
 B)False

Question 19

If the growth rate of the capital stock is 9 percent, the user cost of capital is 13 percent, the capital depreciation rate is 3 percent, and capital gain is 1 percent, the investment rate is about:

Accepted Answer

A)   6.6 percent
B)   30.8 percent
C)   11.7 percent
D)   1.4 percent
E)   50 percentF) A) and E)
G) B) and C) B

Question 20

A decline in the corporate income tax will ________and the firm will ________.

Accepted Answer

A)   raise the user cost of capital; put more money in the bank
B)   increase corporate profits; offset higher capital gains by hiring more labor
C)   lower the capital user cost; invest in more capital
D)   lower the rate of capital depreciation; hire more capital
E)   raise the marginal product of capital; pay more taxesF) A) and E)
G) B) and C)

Exam 17: Investment

Correct Answer
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A

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One reason we are interested in investment is its:

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The company that was one of the first adopters of supply-chain management was:

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The arbitrage condition for capital shows that returns to a bank account are equal to the user cost of capital.

Correct Answer
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In the growth model, we assumed the savings rate was given by , which is exogenous, but from the chapter on investment, we know it is equal to .

Correct Answer
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The conclusion of a study by Steven Davis and James Kahn is that:

Correct Answer
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If a stock is just as likely to move up or down, it:

Correct Answer
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From the residential arbitrage equation, a rise in the down payment will reduce the price of the house, all else equal, while an increase in the real interest rate will reduce the house price, all else equal.

Correct Answer
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In the equation $R \times p _ { k } = M P K + \Delta p _ { k } , \Delta p _ { k }$ is the ________ and $p _ { k }$ Is the ________.

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Refer to the following figure when answering Figure 17.1: Capital Arbitrage -Consider Figure 17.1. If there is an increase in the marginal product of capital, then curve would shift to curve .

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According to the financial asset arbitrage equation, a rise in the capital gain for a stock implies a rise in the real interest rate, all else equal.

Correct Answer
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If the marginal product of capital is 3 percent, the real interest rate is 4 percent, and the capital depreciation rate is 10 percent, what is the equilibrium stock price?

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For the profit-maximizing firm, if the real interest rate is less than the marginal product of capital, the firm should invest in more capital.

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The stock price is .
a. From the above ...
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If the real interest rate is 4 percent, the depreciation rate is 10 percent, the tax rate is 0 percent, and capital gain is 1 percent, the user cost of capital is 13 percent.

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If the growth rate of the capital stock is 9 percent, the user cost of capital is 13 percent, the capital depreciation rate is 3 percent, and capital gain is 1 percent, the investment rate is about:

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B

A decline in the corporate income tax will and the firm will .

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Exam 17: Investment

Correct AnswerverifiedA

Correct AnswerverifiedShow Answer

One reason we are interested in investment is its:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The company that was one of the first adopters of supply-chain management was:

Correct AnswerverifiedShow Answer

The arbitrage condition for capital shows that returns to a bank account are equal to the user cost of capital.

Correct AnswerverifiedShow Answer

In the growth model, we assumed the savings rate was given by ________, which is exogenous, but from the chapter on investment, we know it is equal to ________.

Correct AnswerverifiedShow Answer

The conclusion of a study by Steven Davis and James Kahn is that:

Correct AnswerverifiedShow Answer

If a stock is just as likely to move up or down, it:

Correct AnswerverifiedShow Answer

From the residential arbitrage equation, a rise in the down payment will reduce the price of the house, all else equal, while an increase in the real interest rate will reduce the house price, all else equal.

Correct AnswerverifiedShow Answer

In the equation R×pk=MPK+Δpk,ΔpkR \times p _ { k } = M P K + \Delta p _ { k } , \Delta p _ { k }R×pk​=MPK+Δpk​,Δpk​ is the ________ and pkp _ { k }pk​ Is the ________.

Correct AnswerverifiedShow Answer

Refer to the following figure when answering Figure 17.1: Capital Arbitrage -Consider Figure 17.1. If there is an increase in the marginal product of capital, then curve ________ would shift to curve ________.

Correct AnswerverifiedShow Answer

According to the financial asset arbitrage equation, a rise in the capital gain for a stock implies a rise in the real interest rate, all else equal.

Correct AnswerverifiedShow Answer

If the marginal product of capital is 3 percent, the real interest rate is 4 percent, and the capital depreciation rate is 10 percent, what is the equilibrium stock price?

Correct AnswerverifiedShow Answer

For the profit-maximizing firm, if the real interest rate is less than the marginal product of capital, the firm should invest in more capital.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThe stock price is .a. From the above ...View AnswerShow Answer

If the real interest rate is 4 percent, the depreciation rate is 10 percent, the tax rate is 0 percent, and capital gain is 1 percent, the user cost of capital is 13 percent.

Correct AnswerverifiedShow Answer

If the growth rate of the capital stock is 9 percent, the user cost of capital is 13 percent, the capital depreciation rate is 3 percent, and capital gain is 1 percent, the investment rate is about:

Correct AnswerverifiedB

A decline in the corporate income tax will ________and the firm will ________.

Correct AnswerverifiedShow Answer

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A

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In the growth model, we assumed the savings rate was given by , which is exogenous, but from the chapter on investment, we know it is equal to .

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Correct Answer
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Correct Answer
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Correct Answer
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In the equation $R \times p _ { k } = M P K + \Delta p _ { k } , \Delta p _ { k }$ is the ________ and $p _ { k }$ Is the ________.

Correct Answer
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Refer to the following figure when answering Figure 17.1: Capital Arbitrage -Consider Figure 17.1. If there is an increase in the marginal product of capital, then curve would shift to curve .

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The stock price is .
a. From the above ...
View Answer

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B

A decline in the corporate income tax will and the firm will .

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