Which of the following is a correct reason why a decrease in the money supply will tend to cause stock prices to fall?
A)A decrease in the money supply will cause interest rates to rise, thereby shifting funds from financial to real investments.
B)A decrease in the money supply will cause interest rates to fall, thereby shifting funds from financial to real investments.
C)A decrease in the money supply will result in higher corporate profits in real terms.
D)A decrease in the money supply will cause interest rates to rise, thereby making bonds more attractive investments than stocks.

Question

Quizplus · Accepted Answer

A decrease in the money supply will cause interest rates to rise, making bonds more attractive investments than stocks. This is because a higher interest rate means investors can receive a higher return on their investment in bonds, which are generally considered safer investments than stocks. As a result, investors may sell their stocks in favor of bonds, leading to a decrease in stock prices.

Which of the Following Is a Correct Reason Why a Decrease