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

question 3

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. Therefore, 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:

Lowest Price

The minimum cost at which a product or service is offered in the market.

Short Run

A period of time in economics during which at least one input, usually capital, is fixed and cannot be changed.

Efficient Output

The level of production at which a company or economy can produce the maximum amount of goods and services with the least waste of resources.

Profitable Output

The level of production at which a business or economic activity generates revenue that exceeds its operational costs.