The figure given below shows the demand [D and D'] and supply [S and S'] curves of shares of stock.Figure 17.2

-If bonds and stocks are considered to be substitute goods, and the investors expect stock prices to drop in the near future, _____.

Question

The figure given below shows the demand [D and D'] and supply [S and S'] curves of shares of stock.Figure 17.2
 
-If bonds and stocks are considered to be substitute goods, and the investors expect stock prices to drop in the near future, _____.

Quizplus · Accepted Answer

If investors expect stock prices to drop, they may shift their investments from stocks to bonds, increasing the demand for bonds. As demand for bonds increases, the price of bonds rises, leading to a decline in the interest rate on bonds.

The Figure Given Below Shows the Demand [D and D']