Question

1. If stock rises sharply what will happen to demand for new cars?
2. What impact will be on interest rate if
   1. Stock market is becoming very volatile?
   2. The Fed drastically increases money supply? Is there potentially a different effect short term vs longer term? How?

Answer 1

This is a very subjective question, which we should answer with some data

Let us assume that there is a high correlation with a rise in stock prices and number of cars bought the next year.

This would make a lot of sense, as people would make money in the stock market and use it to buy discretionary products like cars.

While I assume smart investors will not want to purchase a car when stock prices are rising as they want to invest in the rise so that they can earn more money

a) Impact on interest ratewhen market is volatile.

Investing involves risk. Investments have their own risk factors and many of these factors fluctuate. One major risk factor is interest rate risk. Interest rate changes have the greatest impact on long maturity bonds, but they affect stocks and other financial instruments as well. Greater interest rate volatility indicates a greater chance of interest rate increases which would cause many asset prices to drop. Thus, the volatility of interest rates creates uncertainty for investors.

b) The Fed drastically increases money supply? Is there potentially a different effect short term vs longer term? How?

When the fed increases money supply, it will lead to rise in inflaiton, and then the central bank will intervene buy increasing the interest rates to control inflation.

Once inflation is under control, the fed will start to reduce interest rates as moderate inflaiton is good for a economy