Question 1

What is a bond?

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Question 2

What is capital income?

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Question 3

What is the financial capital market? Who are the suppliers in the market? Who are the demanders?

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Question 4

When economists say that mortgages are "securitized" what do they mean by this description?

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Question 5

Why is the manager of a company typically not the same person as an entrepreneur?

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Question 6

Why might two Fortune 500 companies borrow the same amount of money for the same term at the same time yet both pay a very different interest rate even when the same banks makes both loans?

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Question 7

Name two conditions that can cause a capital asset to depreciate.

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Question 8

Why do mortgage companies begin to require larger down payments from their borrowers when housing prices begin to fall?

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Question 9

Why do school districts sell bonds to the public when they are financing a new school building program rather than sell stock?

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Question 10

What is the primary source for capital available to businesses? Name four methods of channeling these funds.

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Question 11

Why does it seem to be more difficult for investors to measure the capital stock of a firm like eBay rather than a firm like Ford Motor Company? Explain.

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Question 12

Is each of the following situations an example of savings, investment, or neither? In each case explain your choice.
(a) A savings and loan association lends money for the purchase of "junk" (not backed) bonds.
(b) John's income is $25,000 per year; $22,000 is spent on consumer goods and the remaining money is used purchase stock in the local electric company.
(c) Just before retirement a couple sells their shares of Pacific Bell stock and puts the proceeds in a bank savings account.
(d) The city of Los Angeles rebuilds highways after an earthquake.
(e) In order to improve the income earning potential of current welfare recipients, the federal government increases the size of income transfers.

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Question 13

What is an entrepreneur?

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Question 14

Explain what occurs in the capital market.

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Question 15

What role do households play in the capital market? What role do firms play?

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Question 16

List and define two types of capital income.

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Question 17

Suppose a firm is considering locating a manufacturing facility in a poorer country where wage rates are much lower than in the United States. Why would social capital be a factor in their decision to relocate? Explain in terms of the impact that a lack of social capital may have on the marginal revenue product

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Question 18

A government wants to build a hydroelectric dam to reduce flooding in a region and provide electricity to its people. What type of investment is this? In order to make a decision about whether or not to make the investment, how should the government evaluate this project?

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Question 19

An Internet start-up company consists of three people with an idea that they wish to use in pursuing a patent for a product. What type of capital does this company have and what is its value?

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Question 20

Many reporters in the media were critical of the high interest rates that many banks charged to lenders in the so-called sub-prime market. Using economic reasoning what was the likely justification for these high interest rates.

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Quiz 11: Input Demand: the Capital Market and the Investment Decision