What Impact Might an Increase in the Budget Deficit Have

question 132

Multiple Choice

What impact might an increase in the budget deficit have on interest rates and exchange rates?

• A)Interest rates and exchange rates increase.
• B)Interest rates increase and exchange rates decrease.
• C)Interest rates decrease and exchange rates increase.
• D)Interest rates and exchange rates decrease.

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Definitions:

M&M Proposition I

Modigliani and Miller Proposition I states that in a world without taxes, bankruptcy costs, and asymmetric information, a firm's value is unaffected by how it is financed, whether by debt or equity.

Law Of One Price

An economic theory that states that in efficient markets, identical goods must have only one price.

Technically Insolvent

A situation where an entity's liabilities exceed its assets, indicating it cannot currently meet its debt obligations with its available assets.

Firm's Assets

All the resources owned by a company, including cash, investments, property, and inventory, that have value and can be used to meet its financial obligations.