Refer to the Diagram

question 355

Multiple Choice

Refer to the diagram. If the full-employment level of GDP is A, then it would be appropriate fiscal policy for government to

• A) decrease spending and increase taxes.
• B) decrease spending and decrease taxes.
• C) increase spending and increase taxes.
• D) increase spending and decrease taxes.

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Definitions:

M&M Proposition II

A theory proposing that the cost of equity increases with the level of debt in a company, making the firm's weighted average cost of capital remain unchanged.

Cost of Equity

The return rate that shareholders require to invest in a company's equity, taking into account the risk associated with the investment.

Cost of Debt

The effective rate that a company pays on its current debt, incorporating both interest payments and any other required repayments.

Cost of Equity

The return that investors require for their investment in shares, representing the compensation for taking on the risk of investing in equity.