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:

Trichomes

Small hair-like appendages on plants that serve various functions including defense against insects and reducing water loss.

Collenchyma

A type of plant tissue characterized by its living, elongated cells with unevenly thickened walls that provide structural support.

Xylem

A type of vascular tissue in plants that transports water and dissolved nutrients from the roots to the rest of the plant.

Maturation

The process of becoming mature, involving growth and development in organisms or the aging of beverages and cheeses to enhance flavor.