If Business Taxes Are Reduced and the Real Interest Rate

question 15

Multiple Choice

If business taxes are reduced and the real interest rate increases,

• A) consumption and saving will necessarily increase.
• B) the level of investment spending might either increase or decrease.
• C) the level of investment spending will necessarily increase.
• D) the level of investment spending will necessarily decrease.

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Definitions:

Green Shoe Option

A clause in an IPO that allows underwriters to buy and sell additional shares than originally planned, stabilizing the stock price.

Underpricing Effect

The phenomenon where new stock offerings are priced below their market value, often leading to an immediate increase in their price upon trading.

Market Price

The prevailing transaction price for an asset or service.

Securities

Securities are financial instruments that represent an ownership position in a publicly-traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership as represented by an option.