If investors become more optimistic and expect that long-term earnings will increase 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

Increased optimism about long-term earnings and a decrease in the real rate of interest both contribute to an increase in stock prices. Optimism boosts demand for stocks due to anticipated higher future earnings, while lower interest rates make stocks more attractive compared to bonds, driving up stock prices.

If Investors Become More Optimistic and Expect That Long-Term Earnings