Question

What will happen to interest rates if the public suddenly expects a large increase in stock​ prices?

a. interest rates will rise because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds decreases
b. interest rates will fall because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds decreases
c. interest rates will rise because the expected increase in stock prices raises the liquidity of stocks relative to bonds and so the demand for bonds decreases
d. interest rates will fall because the expected increase in stock prices raises the liquidity of stocks relative to bonds and so the demand for bonds decreases?

Answer 1

I believe the answer would be A, interest rates will rise because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds increases. The demand curve, such that the demand curve will shift to the left and the equilibrium bond price falls and consequently the interest rate increases.