For the Following Questions Refer to Figure 16

question 54

Multiple Choice

For the following questions refer to Figure 16.2 below.
-Your grandmother is a follower of the financial press and decides to quiz you about your knowledge of financial markets.She asks you to explain the price of stock prices based on the financial capital arbitrage equation.She shows you the graph shown in Figure 16.2 above,which shows the Dow Jones Industrial (DJI) Average for 2000-2010.She asks you to explain the cause in the rise of stock prices for the years 2007-2009.You tell her:

• A)"The graph suggest there are capital losses in financial markets,so to cover these losses stock prices have to rise."
• B)"Grandma,I was an art major and didn't have to take finance or economics classes."
• C)"Ironically,falling capital gains have no impact on stock prices."
• D)"A falling DJI leads to negative capital gains in financial assets.This,in turn,drives stock prices down."
• E)"Because,in equilibrium,the real interest rate,capital gains,and dividends move in tandem,the decline in stock prices is due to 'irrational exuberance.'"

---

Definitions:

Personality

The unique combination of characteristics and traits that define an individual's patterns of thought, emotion, and behavior.

Unconscious

Pertains to the part of the mind that is inaccessible to the conscious mind but that affects behavior and emotions.

Conscious

The state of being aware of and able to think about one's own existence, sensations, thoughts, surroundings, and experiences.

Preconscious

In Freudian psychology, thoughts and feelings not currently in awareness but can be easily brought to consciousness.