If expectations for long-term inflation rose, but the slope of the SML remained constant, this would have a greater impact on the required rate of return on equity, r_s, than on the interest rate on long-term debt, r_d, for most firms.Therefore, the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt.

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The required rate of return on equity (r_s) and the interest rate on long-term debt (r_d) are both affected by inflation expectations. However, the cost of debt is typically more sensitive to changes in inflation expectations because debt contracts are fixed in nominal terms, while equity returns can adjust more flexibly. Therefore, the percentage point increase in the interest rate on long-term debt could be greater than the increase in the cost of equity.

If Expectations for Long-Term Inflation Rose, but the Slope of the SML