Suppose There Are Two Types of Bonds (One- Year Bonds

question 31

Multiple Choice

Suppose there are two types of bonds (one- year bonds and two- year bonds) and that the yield curve is initially upward sloping in period t. For this question assume that: (1) expected inflation is zero; and (2) the relevant interest rate on the vertical axis of the IS- LM model is the one- year interest rate. Based on our understanding of the IS- LM model, of the yield curve and of financial markets, we know with certainty that an announcement in period t of a partially unexpected future increase in taxes (to be implemented in period t + 1) will have which of the following effects?

• A) Stock prices will fall in period t.
• B) The yield curve will become steeper in period t.
• C) Stock prices will increase in period t.
• D) The yield curve will become flatter in period t.
• E) Stock prices will not change in period t.

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Definitions:

Period Cost

Expenses that are incurred during a specific time period but are not directly tied to the manufacturing process, such as selling, general, and administrative expenses.

Owners' Equity

The residual interest in the assets of a company after deducting liabilities, representing the owners' claim on the business.

Balance Sheet Valuations

The process of determining the value of assets, liabilities, and equity as they are presented on a company's balance sheet at a specific point in time.

U.S.GAAP

United States Generally Accepted Accounting Principles, a set of accounting standards used in the U.S. for financial reporting.