If the expected gains on stocks rise, while the expected returns on bonds do not change, then
A)the demand curve for bonds will shift to the right.
B)the supply curve for loanable funds will shift to the right.
C)the equilibrium interest rate will fall.
D)the equilibrium interest rate will rise.

Question

Quizplus · Accepted Answer

If the expected gains on stocks rise, investors will shift their funds from bonds toward stocks, reducing the demand for bonds and raising their interest rates. This will increase the cost of borrowing for firms, leading them to reduce their investment in capital and thus decreasing the supply of loanable funds. These changes in the bond market and the loanable funds market will increase the equilibrium interest rate.

If the Expected Gains on Stocks Rise, While the Expected