Assume that the RBA is expected to respond to any event by keeping the interest rate constant (i.e., equal to its initial level). An unexpected tax increase will cause:
A) stock prices to fall.
B) stock prices to rise.
C) no change in stock prices.
D) an ambiguous effect on stock prices.
E) stock prices fall only if goods prices fall.

Question

Quizplus · Accepted Answer

An unexpected tax increase will reduce disposable income, which in turn will lower consumer spending on goods and services. This will lower the profits of firms, leading to a fall in stock prices. Since the RBA is expected to keep the interest rate constant, there will be no offsetting effect on stock prices.

Assume That the RBA Is Expected to Respond to Any