Explain how changes in the economy affect prices. Give two examples from the current business environment

Expert Solution

Changes in the economy will affect the prices of the securities and other asset classes as changes in economy are reflecting the macro factors upon which a business is exposed and they cannot control these factors because these factors are inherent to the existence of any business.

Businesses are significantly impacted by the systematic risk associated with their performance and if there is a growth like scenario in the entire economy, it would be reflected in growth for these businesses and it would be reflected in their prices and when there would be a significant slowdown in the economy, then due to the slowdown of the demand, it would be reflected into the the sales and profits of the company and it would be subsequently reflected into the price of the company on the downside.

Economic cycles are very important as we can see from the current environment in which there is a fear of impending recession and significant slowdown of the growth and lack of demand in the entire economy so it has been discounted through a sharp downside in the equities at the beginning of the year because there were a lot of uncertainty related to economies of the world and prices of securities has gone down.

when there was reduction of interest rate in retaliation of slowing demand in order to boost the demand in the economy, then it has helped the expectations of market revival and it is also reflected into the price of these security as they have recovered from a bear market and recovered significantly.

So it can be summarised that the changes in economy affect the prices.

jeff jeffy answered 2 years ago

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