If the real interest rate decreases, we would initially expect
A) the price of stocks to decrease.
B) the price of bonds to decrease.
C) the price of stocks to increase.
D) the exchange rate to decrease.

Question

Quizplus · Accepted Answer

When the real interest rate decreases, the cost of borrowing money becomes cheaper, making it more attractive for businesses to finance new projects and for consumers to spend more. This increased economic activity can lead to higher corporate earnings, making stocks more attractive to investors and driving up their prices. Additionally, lower interest rates make bonds and other fixed-income investments less attractive in comparison, leading investors to shift their money into stocks, further driving up stock prices.

If the Real Interest Rate Decreases, We Would Initially Expect