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 cut 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 to rise only if goods prices rise.

Question

Quizplus · Accepted Answer

An unexpected tax cut will increase consumer disposable income and increase spending, which will lead to higher corporate earnings and thus higher stock prices. The RBA keeping interest rates constant will not affect this relationship.

Assume That the RBA Is Expected to Respond to Any