If the expected gains on stocks rise,while the expected returns on bonds do NOT change,then
A) the demand curve for bonds will shift to the right.
B) the supply curve for loanable funds will shift to the right.
C) the equilibrium interest rate will fall.
D) the equilibrium interest rate will rise.

Question

Quizplus · Accepted Answer

When the expected gains on stocks rise, investors will shift their funds towards investing in stocks rather than investing in bonds, which would result in a decrease in demand for bonds. As the demand for bonds decreases, the price of bonds falls and thus, the yield on bonds increases. Therefore, the returns on bonds will remain the same while their prices fall. As a result of the fall in the price of bonds, the cost of borrowing funds for businesses that issue bonds will go up. In order to compensate for this increase in the cost of borrowing, interest rates will have to rise to achieve equilibrium in the loanable funds market.

If the Expected Gains on Stocks Rise,while the Expected Returns