Suppose the money market is in the liquidity trap and the Fed increases the supply of money. We expect thata. people will end up willingly holding more money. b. the excess money holdings will flow into the loanable funds market and there will be a decrease in interest rates. c. interest rates will increase, since the demand curve for money is upward sloping in this case. d. eventually, via the transmission mechanism, Real GDP will increase.

The common stock and debt of northern sludge are valued at $65 million and $35 million, respectively. investors currently require a return of 15.9% on the common stock and a return of 7.8% on the debt. if northern sludge issues an additional $14 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? assume that the change in capital structure does not affect the interest rate on northern’s debt and that there are no taxes.