Explain why a lowering of interest rates should raise stock prices.
What will be an ideal response?
The price of a stock reflects the net present value of the future flow of earnings. Immediately we see then from the present value formula that a lower discount (interest) rate will increase the present value. Also, if lower interest rates boost consumer and business confidence, raising expectations, the anticipation of higher future earnings will also increase the present value of share prices.
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Normative economics answers the question, "What ought to be?" Positive economics predicts the consequences of alternative actions, answering the questions, "What is?" or "What will be?"
Indicate whether the statement is true or false
"Cheap foreign wages" is a poor argument for protection because it fails to recognize the importance of productivity. Which of the following does NOT contribute to increasing productivity?
A) Education and training B) Government subsidies C) Infrastructure D) Capital
If there is an increase in government spending, then, ceteris paribus, the IS curve:
A) will shift to the left. B) will shift to the right. C) will not shift at all. D) will shift to the left if there is a corresponding decrease in taxes.
If a hurricane were to wipe out the majority of the eastern seaboard in the United States, it would likely cause a:
A. short-run supply shock. B. long-run supply shock. C. long-run demand shock. D. short-run demand shock.