Answer:
The correct answer is: firms are unlikely to undertake investment.
Explanation:
The liquidity trap is a situation described in the Keynesian economy according to which, liquidity injections into the private banking system by the central bank do not lower interest rates or inject money into the economy and therefore do not stimulate economic growth as claimed by monetarism.
The liquidity trap occurs when people accumulate cash because they expect an adverse event, such as deflation, reduction in aggregate demand and GDP, an increase in the unemployment rate or a war. People are not buying, companies are not borrowing and banks are not lending either because they do not have enough solvency since the economic outlook is uncertain and investors do not invest because the expected returns on investments are low.
The most common characteristics of a liquidity trap are interest rates close to zero and fluctuations in the monetary base that do not translate into fluctuations in general price levels.
Answer: a. 1.42
b) 2.74
c) 3.89
Explanation:
a) The Degree of Operating Leverage measures how much operating Income will change by if Sales change.
It is calculated with the formula,
= (Sales - Variable Costs) / (Sales - Variable Costs - fixed costs)
= (960,000 - 532,000) / (960,000 - 532,000 - 127,000)
= 1.42
b) The Degree of financial leverage measures how much Income will change due to a change in operating Income.
The formula is,
=Earnings before Interest and tax / Earnings before Interest and tax - Interest or just Earning before tax
= 301,000/110,000
= 2.74
c. Degree of Total Leverage is a measure of how sensitive the net income of a company is to a change in goods produced and/or sold.
It is calculated by multiplying DOL and DFL.
= 1.42 * 2.74
= 3.89
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Answer:
Option C is the answer
Explanation:
The degree of operating leverage is measured by dividing the contribution margin by operating income.
The degree of operating leverage (DOL) is the ratio of contribution margin to operating income. It measures how much the operating income of a company will change in response to a change in sales. A Companies that have higher proportion of fixed costs to variable cost will have greater levels of operating leverage.
