Figure 22-5 Use the Graph Below to Answer the Following Questions

question 57

Multiple Choice

Figure 22-5
Use the graph below to answer the following questions.
-Refer to Figure 22-5. If the economy starts at C and the money supply growth rate increases, then in the short run the economy moves to

• A)B.
• B)D.
• C)F.
• D)None of the above is consistent with an increase in the money supply growth rate.

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Definitions:

M&M Proposition II

Part of the Modigliani-Miller theorem on capital structure, stating that the cost of equity increases with higher levels of debt, as a consequence of the increased risk taken by equity holders.

Cost of Equity

The compensation that investors demand for bearing the risk of owning stock, usually reflected by earnings or dividend growth expectations.

Required Rate of Return

The minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project.

M&M Proposition II

Part of the Modigliani-Miller theorem stating that a company's cost of equity increases as its level of debt increases, due to the higher risk of default.