   Chapter 15, Problem 12QP

Chapter
Section
Textbook Problem

The discussion of supply and demand in Chapter 3 noted that, if two goods are substitutes for each other, the price of one and the demand for the other are directly related. For example, if Pepsi-Cola and Coca-Cola are substitutes, an increase in the price of Pepsi-Cola will increase the demand for Coca-Cola. Suppose that bonds and stocks are substitutes for each other. We know that interest rates and bond prices are inversely related. What do you predict is the relationship between stock prices and interest rates? Explain your answer.

To determine

The relationship between the stock prices and interest rates.

Explanation

When the stocks and bonds are treated as substitutes, an increase in the price of one good results in an increase of the demand for the substitute. When there is an increase in the bond price, it leads to an increase in the demand for stocks and hence, the stock price increases...

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