Economics and Investment Markets

Correct Answer: An increase in the money supply leads to a decrease in interest rates, as the increased liquidity in the market reduces the demand for holding money and lowers the equilibrium interest rate.

According to the liquidity preference theory, an increase in the money supply leads to a decrease in interest rates in the short run. When the money supply increases, there is more liquidity in the market, which reduces the demand for holding money. As a result, the equilibrium interest rate falls. The other two answers are incorrect because: - An increase in the money supply does not lead to an increase in interest rates. While increased liquidity may stimulate economic activity, it does not directly raise the demand for borrowing or the equilibrium interest rate in the short run. - The liquidity preference theory does not suggest that changes in the money supply have no significant impact on interest rates in the short run. Instead, it posits a negative relationship between the money supply and interest rates.

Correct Answer: The stock prices of the affected companies are likely to decline as investors anticipate lower future earnings.

The correct answer is that the stock prices of the affected companies are likely to decline as investors anticipate lower future earnings. The new government policy is expected to limit the market power of large corporations and lead to lower profit margins for the affected companies. Lower profit margins typically result in reduced earnings for these companies, which in turn makes their stocks less attractive to investors. As investors anticipate lower future earnings, they are likely to sell their shares, leading to a decline in the stock prices of the affected companies. The other answers are incorrect because: - An increase in stock prices is unlikely when investors expect lower future earnings and profitability for the affected companies. - The stock prices are unlikely to remain unchanged, as the market would react to the expected impact of the policy change on the companies' future performance. The market is forward-looking and would price in the anticipated effects of the regulatory shift.

Correct Answer: Long-term interest rates decrease as the central bank purchases government bonds, increasing their prices and reducing their yields.

The correct answer is that long-term interest rates decrease as the central bank purchases government bonds, increasing their prices and reducing their yields. Quantitative easing is a monetary policy tool used by central banks to stimulate the economy. When a central bank implements quantitative easing, it purchases large amounts of government bonds and other securities from the market. This increases the demand for these securities, driving up their prices. As bond prices and yields have an inverse relationship, the increased demand leads to lower long-term interest rates. The other two options are incorrect: Short-term interest rates are not likely to increase due to quantitative easing. In fact, the injection of liquidity into the financial system may lead to lower short-term rates as well. Quantitative easing involves the central bank purchasing securities, which expands its balance sheet, not contracts it. The goal is to increase the money supply in the economy, not reduce it.