If a Local Government Eliminates the Tax Exemption on Municipal

question 76

Multiple Choice

If a local government eliminates the tax exemption on municipal bonds, we'd expect to see:

• A) an increase in the yield on taxable bonds.
• B) a decrease in the gap in yields on taxable and tax-exempt bonds.
• C) a decrease in the yield on municipal bonds.
• D) municipal bonds will become more attractive to investors.

---

Definitions:

Short Run

A time period during which at least one input, such as plant size or capital, is fixed and cannot be changed.

Identical Firms

Identical firms refer to businesses within the same industry that have no significant differences in their products, production methods, or operational efficiency.

Linear Marginal Cost

A cost structure where the marginal cost of producing one additional unit is constant, regardless of the quantity produced.

Market Price

The current price at which an asset or service can be bought or sold, determined by the supply and demand forces in the market.