Graphically Illustrate the Traditional View of the Short-Run and Long-Run

question 67

Essay

Graphically illustrate the traditional view of the short-run and long-run impacts of a debt-financed tax cut on interest rates and output in a closed economy in the short-run and long-run using the IS-LM model.

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Definitions:

ROE

Return On Equity represents a financial performance metric that is obtained by dividing a company's net income by its shareholders' equity, demonstrating the company's effectiveness in using investor funds to grow earnings.

EPS

Earnings Per Share, a key indicator of a company's profitability, calculated by dividing the company's net income by its total number of outstanding shares.

DFL

Degree of Financial Leverage, a ratio measuring the sensitivity of a company's earnings per share to fluctuations in its operating income, due to changes in its capital structure.

Optimal Capital Structure

The most favorable blend of debt and equity financing that minimizes a company's cost of capital while maximizing its market value.