Refer to the following figure when answering the following questions.
Figure 17.1: Capital Arbitrage
-Consider Figure 17.1. If there is an increase in capital gains, then curve ________ would shift to curve ________.
A) d; c
B) b; a
C) c; d
D) a; b
E) Not enough information is given.

Question

Refer to the following figure when answering the following questions.
Figure 17.1: Capital Arbitrage 
-Consider Figure 17.1. If there is an increase in capital gains, then curve ________ would shift to curve ________.
A) d; c 
B) b; a 
C) c; d 
D) a; b 
E) Not enough information is given.

Quizplus · Accepted Answer

If there is an increase in capital gains, this would increase the after-tax return on equities compared to bonds, which would lead investors to shift their investments towards equities, causing an increase in demand and price for equities. This would shift curve c (equities) to the right, while curve d (bonds) would shift to the left as investors move away from bonds. Therefore, the correct answer is C.

Refer to the Following Figure When Answering the Following Questions