Suppose that monetary policy becomes more expansionary, and as a result, the future rate of inflation is higher. Will this be good for the stock market?
A) Yes; the inflation will lead to higher wages, and this will be good for both the economy and the stock market.
B) No; the inflation will lead to higher nominal interest rates, and this will reduce the present value of the future net earnings derived from stocks.
C) Yes; the inflation rate will reduce the long-run rate of unemployment, and this will be good for the stock market.
D) No; the expansionary monetary policy will lead to lower real interest rates, and this is generally bad for both the economy and the stock market.

Question

Quizplus · Accepted Answer

Higher inflation typically leads to higher nominal interest rates, which can reduce the present value of future earnings from stocks, potentially negatively impacting the stock market.

Suppose That Monetary Policy Becomes More Expansionary, and as a Result