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.'"

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Definitions:

The Spacing Effect

A phenomenon in psychology where learning is more effective when study sessions are spaced out over time, rather than crammed into one session.

Long-Term Potentiation

A long-lasting increase in synaptic strength between two neurons, thought to be a biological mechanism underlying learning and memory.

Synaptic Basis

The fundamental mechanisms of how neurons communicate with each other through synapses.

Priming

A psychological principle whereby exposure to one stimulus influences the response to a subsequent stimulus, without conscious guidance or intention.