If the risk premium associated with holding stocks decreases at the same time that the real rate of interest decreases, we would
A) initially expect the price of stocks to increase.
B) initially expect the price of bonds to decrease.
C) initially expect the price of stocks to decrease.
D) be unable to determine the impact on the price of stocks unless we knew the relative magnitudes of the changes.

Question

Quizplus · Accepted Answer

A decrease in the risk premium associated with holding stocks makes stocks more attractive to investors, leading to increased demand and higher prices. Similarly, a decrease in the real rate of interest makes bonds less attractive relative to stocks, as the return on bonds falls, leading investors to shift their investments towards stocks, further increasing stock prices.

If the Risk Premium Associated with Holding Stocks Decreases at the Same