If the real interest rate increases, we would initially expect
A) the price of stocks to decrease.
B) the price of bonds to increase.
C) the price of stocks to increase.
D) the exchange rate to decrease.

Question

Quizplus · Accepted Answer

When the real interest rate increases, the cost of borrowing money becomes more expensive. This generally leads to a decrease in investment and spending, which can negatively impact company profits and, consequently, the price of stocks. Additionally, higher interest rates make bonds and other fixed-income investments more attractive compared to stocks, leading to a shift away from stocks and contributing to a decrease in their prices.

If the Real Interest Rate Increases, We Would Initially Expect