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QUESTION 4 Q4. Other things being equal, we do not expect share prices to go down if Interest rates foll. True False

Please explain why it is ture or false. Thank you.

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Answer #1

Answer: true

There is an inverse relationship between stock price and market interest rate – if one increases the other decreases.

Explanation: At the increasing market interest rate, people would be having more burden of paying interest, which reduces their consumption spending; this reduces revenues of businesses and their net income; if net income reduces, share prices also have to drop.

Again, if the market interest rate is low, consumption spending would increase, which increases revenues, net incomes, and share prices of businesses.

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