If the savings interest rate rises, to maintain the financial asset arbitrage equality, either the ________ or the ________, or both.
A) equity falls; price-to-equity ratio falls
B) risk premium falls; dividends rise
C) capital depreciation rises; investment rate rises
D) dividends rise; capital gain rises
E) marginal product of capital falls; user cost falls

Question

Quizplus · Accepted Answer

If the savings interest rate rises, the expected return on savings increases, making stocks less attractive. To maintain the financial asset arbitrage equality, the dividends need to rise, or capital gains need to rise, or both. This will increase the expected return on stocks and maintain financial asset arbitrage equality.

If the Savings Interest Rate Rises, to Maintain the Financial