Author Question: Suppose the Fed implements a monetary expansion that is at least partially unexpected. Explain what ... (Read 96 times)

sc00by25 · **on:** Jun 30, 2018

Suppose the Fed implements a monetary expansion that is at least partially unexpected. Explain what effect this will have on stock prices.

What will be an ideal response?

Question 2

We know with certainty that a tax increase must cause which of the following?

A) an increase in investment
B) a reduction in investment
C) no change in investment
D) none of the above

macagnavarro · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

This will cause the interest rate to fall and output to rise. The lower interest rate will increase the present value of future dividends. The increase in output will cause an increase in expected dividends because profits are now expected to be higher. Both of these effects cause stock prices to rise.

Answer to Question 2

D