Suppose US

question 33

Multiple Choice

Suppose U.S. interest rates fall. This reduction in U.S. interest rates will cause which of the following to occur?

• A) an outflow of capital from the United States
• B) no change in foreign investment in the United States
• C) an increase in the value (appreciation) of the U.S. dollar
• D) an inflow of capital to the United States

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Definitions:

Interest Tax Shield

The decrease in income tax liabilities due to permitted interest expense deductions.

Levered Firm

A corporation that has debt in its capital structure, indicating it uses borrowing (leverage) to finance its operations or expansions.

M&M Proposition I

A principle of financial theory stating that under perfect market conditions, the value of a firm is unaffected by how it is financed.

Liquidation

The process of converting assets into cash or cash equivalents by selling them in the market.