If There Was No Profit Effect or Misperception Effect in the Short

question 147

Multiple Choice

If there was no profit effect or misperception effect in the short run,how would the SRAS and LRAS curve be drawn?

• A)The SRAS and the LRAS would both be vertical.
• B)The SRAS would be vertical and the LRAS would be upward sloping.
• C)The SRAS would be upward sloping and the LRAS would be vertical.
• D)The SRAS and LRAS would both be upward sloping.

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Definitions:

Security Market Line

A representation in the Capital Asset Pricing Model (CAPM) showing the relationship between the expected return of a security and its risk, measured by beta.

Marginal Tax Rate

The rate at which the next dollar of taxable income would be taxed, reflecting the percentage taken by taxes in the next higher tax bracket.

SML Approach

It refers to the Security Market Line approach, a graphical representation of the Capital Asset Pricing Model (CAPM) that shows the relationship between expected return and beta (market risk).

Reward-to-Risk Ratio

A metric used in finance to compare the expected returns of an investment to the amount of risk undertaken to capture these returns.