If Expectations for Long-Term Inflation Rose, but the Slope of the SML

question 13

True/False

If expectations for long-term inflation rose, but the slope of the SML remained constant, this would have a greater impact on the required rate of return on equity, rs, than on the interest rate on long-term debt, rd, for most firms. In other words, the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt.

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Definitions:

Consumption Function

A formula that expresses the relationship between total consumption and gross national income.

Standard Deviation

A statistic that measures the dispersion or variability of a dataset relative to its mean, used to quantify the amount of variation or dispersion of a set of values.

Aggregate Income

The total income earned by all factors of production in an economy, including wages, rents, interest, and profits.

Aggregate Consumption

The total amount of goods and services consumed in an economy, often used to analyze economic health and growth.