Given Full-Employment Output = $2,800, Equilibrium Output = $2,500, and MPS

question 52

Multiple Choice

Given full-employment output = $2,800, equilibrium output = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of national output?

• A) $300 decrease in taxes.
• B) $75 increase in government spending.
• C) $75 decrease in taxes.
• D) $300 increase in government spending.

Recognize the bases for the component costs of capital.

Compare the cost of external equity with the cost of retained earnings and understand flotation costs.

Evaluate the conditions under which retained earnings should be considered the first source of capital.

Identify factors affecting the cost of capital and the decision to use debt or equity financing.

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Definitions:

Market Rate

The prevailing interest rate available in the market for securities of a similar risk and maturity, or the standard rate charged or paid for a specific service or commodity.

Face Amount

The nominal value or principal amount of a security stated by the issuer, due to be paid at maturity.

Straight-Line Method

A method of calculating depreciation of an asset, which spreads the cost of the asset evenly over its useful life.

Bond Premium

The amount by which the market price of a bond exceeds its principal amount or face value.