ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Increase credit availability and increase asset prices
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Lower credit availability and lower asset prices
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Either A or B
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None of the above
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Detailed explanation-1: -A lower interest rate decreases the cost of borrowing, raises in-vestment levels (say for firms or home-buyers), and thus raises the asset price.
Detailed explanation-2: -As interest rates on savings rise, some investors will prefer the safety of holding wealth with banks. This lowers the demand for and thereby the price of assets. Second, higher interest rates reduce the fundamental value of assets.
Detailed explanation-3: -Lowering rates makes borrowing money cheaper. This encourages consumer and business spending and investment and can boost asset prices. Lowering rates, however, can also lead to problems such as inflation and liquidity traps, which undermine the effectiveness of low rates.
Detailed explanation-4: -Higher borrowing costs may make it impossible for collateral-constrained natural buyers to fully roll over loans used to buy the asset, and the resulting drop in “cash in the market” necessitates a lower level of the asset price.