Suppose That an Increase in the Price Level Reduces the Value

question 45

Multiple Choice

Suppose that an increase in the price level reduces the value of real wealth,which then causes a reduction in consumption but no change in saving.In this case,there is

• A) both an interest rate effect and a wealth effect.
• B) no wealth effect.
• C) an interest rate effect but no wealth effect.
• D) a wealth effect but no interest rate effect.
• E) no wealth effect and no interest rate effect.

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Definitions:

Weighted Average Cost of Capital (WACC)

The rate that a company is expected to pay on average to all its security holders to finance its assets, a key factor in capital budgeting decisions.

Cost of Equity

The return that investors expect for investing in a company's equity, representing the compensation for the risk taken.

Cost of Debt

The effective rate that a company pays on its borrowed funds, which can include loans, bonds, and other forms of debt.

Debt/Equity Ratio

This ratio demonstrates the equity to debt proportion in the context of financing company assets.