Refer to the Following Figure When Answering the Following Questions

question 100

Multiple Choice

Refer to the following figure when answering the following 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?

• A) "As the DJI rises, there are financial capital gains that drive up stock prices."
• B) "The rise in the DJI implies that 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."

Evaluate the effects of government budget deficits and surpluses on the economy, especially concerning interest rates and net capital outflows.

Identify factors leading to shifts in supply and demand curves in the market for foreign-currency exchange and loanable funds.

Explain the concepts of tariffs, quotas, and their impact on trade and exchange rates.

Connect fiscal policy changes to shifts in the macroeconomic indicators such as interest rates, net capital outflows, and exchange rates.

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Definitions:

Transaction Costs

The expenses incurred when buying or selling a good or service, which can include search, bargaining, and enforcement costs.

Marginal Social Benefit

The additional benefit to society resulting from one more unit of a good or service being produced and consumed.

Marginal Social Cost

The total cost society bears for the production of an additional unit of a good or service, including both external and private costs.

Coal Mine Pollution

Environmental contamination resulting from the operation of coal mines, including air and water pollution.