Figure 16-3 -Refer to the Figure 16-3.When Would the Economy Move from Economy

question 53

Multiple Choice

Figure 16-3
-Refer to the Figure 16-3.When would the economy move from c and 3 to b and 2?

• A) in the short run if money supply growth increased unexpectedly
• B) in the short run if money supply growth decreased unexpectedly
• C) in the long run if money supply growth increased
• D) in the long run if money supply growth decreased

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Definitions:

M&M Proposition II

This financial theory, originating from Modigliani and Miller, states that a firm's cost of equity increases as the firm increases its level of debt financing, holding everything else constant.

Capital Structure

The mix of different forms of financial securities used by a firm to finance its operations, typically consisting of debt and equity.

Levered Firm

A company that has debt in its capital structure, implying that it has taken on borrowing to finance its operations or growth.

Unlevered Firm

A business or company that operates without any debt financing, meaning it does not have any borrowings in its capital structure.