An Increase in the Real Interest Rate

question 162

Multiple Choice

An increase in the real interest rate

• A)causes the nongovernment share of GDP line to shift to the right.
• B)causes the nongovernment share of GDP line to shift to the left.
• C)causes a downward movement along the nongovernment share line.
• D)causes an upward movement along the nongovernment share line.
• E)has an indeterminate effect on nongovernment expenditures since some nongovernment expenditures are positively related to the interest rate while others exhibit a negative relationship.

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Definitions:

Financial Distress Costs

Expenses incurred by a company when it faces financial difficulties, including bankruptcy costs and the cost of lost opportunities.

Tax Liability

The total amount of tax that an individual, corporation, or other entity is legally obligated to pay to an authority as the result of the occurrence of a taxable event.

Target Capital Structure

The ideal mix of debt, preferred equity, and common equity that a firm aims to achieve to minimize cost of capital.

Shareholder Value

The return on investment that shareholders receive from a company, including dividends and stock price appreciation.