Question

Explain the following economic relationships: interest rates and stock prices; money supply and excess liquidity and stock price; government budget deficit and interest rates; government budget deficit and stock price; $ and trade balance; US versus foreign interest rates and the $; demographics and agin and stock prices.

Answer 1

Interest rates and stock prices

THERE IS AND INVERSE RELATIONSHIP BETWEEN INTEREST RATE AND STOCK PRICES WHICH MEANS WHEN INTEREST RATE ARE RISE THE STOCK PRICE BECOME LOW AND VICE VERSA.

RISING OR FALLING INTEREST RATE INDIRECTLY AFFECTS THE MARKET. THE INCREASED INTEREST RATE REDUCES THE DISPOSABLE INCOME OF THE INVESTORS BECAUSE THEY REDUCE THEIR EXPENDITURE.THUS STOCK PRICE DROP. ON THE OTHER HAND WHEN THE INTEREST RATE FALL THE INVESTOR ARE READY TO SPEND MORE WHICH LEADS TO RISING STOCK PRICE.

Money supply and Excess Liquidity and Stock price

THERE IS A DIRECT RELATIONSHIP BETWEEN MONEY SUPPLY & STOCK PRICE.

MONEY SUPPLY REFERS TO THE CURRENCY FLOWING IN THE ECONOMY. MORE THE MONEY IN THE MARKET MORE THE CONSUMERS ARE WILLING TO SPEND . THUS INCREASING THE STOCK PRICE . IF THE ECONOMY HAVE TIGHT MONEY SUPPLY THEN THE CONSUMER WILL INCREASE SAVING AND SPEND LESS WHICH MEANS THE STOCK PRICE WILL DECLINE.

THERE IS A DIRECT RELATIONSHIP BETWEEN LIQUIDITY AND STOCK PRICE.

IF THE MARKET OFFER EXCESS LIQUIDITY THE INVESTOR WILL BE READY TO INVEST THEIR CAPITAL AS THEY ARE ASSURED THEIR MONEY CAN BE EASILY CONVERTED BACK TO MONEY WHEN THEY NEED. BUT WHEN THE MARKET IS NOT HAVING SUFFICIENT LIQUIDITY THE INVESTOR BECOME PRUDENT RESULTING INTO DECREASE IN STOCK PRICE TO ATTRACT INVESTORS.

Government budget deficit and Interest rates

THERE IS A DIRECT RELATIONSHIP BETWEEN THE GOVERNMENT BUDGET DEFICIT AND INTEREST RATES.

WHEN GOVERNMENT BUDGET DEFICIT IS MORE THEN THEY RAISE MONEY THROUGH ISSUE OF TREASURY BONDS WHICH INCREASES THE INTEREST RATE. INCREASED INTEREST RATE REDUCES THE QUANTITY OF PRIVATE INVESTMENT INVESTMENT DEMANDED. IT INCREASES THE DEMAND AND REDUCES THE SUPPLY OF DOLLAR IN THE FOREIGN MARKET THUS INCREASING THE EXCHANGE RATE WHICH REDUCES THE NET EXPORTS.ALL OF THIS REDUCE THE AGGREGATE DEMAND THAT EFFECTS THE BUDGET DEFICIT.

Government budget deficit and Stock price

THERE IS AN INVERSE RELATIONSHIP BETWEEN GOVERNMENT BUDGET DEFICIT AND STOCK PRICE.

IN CASE OF GOVERNMENT BUDGET DEFICIT, GOVERNMENT ISSUE TREASURY BONDS WHICH INCREASES THE INTEREST RATE AND INCREASED INTEREST RATE REDUCE THE EXPENDITURE OF CONSUMER. THUS DISPOSABLE INCOME OF CONSUMER DECLINE WHICH REDUCES THE STOCK PRICE.

SECOND OPINION CAN BE BONDS ARE ALTERNATE FOR STOCK. DUE TO RISK FREE RETURNS IN BONDS INVESTOR PREFER BONDS OVER STOCK. THIS REDUCING THE STOCK PRICE TO ATTRACT THE INVESTORS.

DOLLAR AND TRADE BALANCE

THERE IS AND INVERSE RELATIONSHIP.

THE DEPRECIATION IN THE DOLLAR IMPROVES THE TRADE BALANCE AND A STRONG DOLLAR REDUCES THE TRADE BALANCE.

THIS HAPPEN DUE TO PURCHASING POWER.THE DEPRECIATED DOLLAR INCREASES THE PURCHASING POWER OF THE BUYER WHICH IMPROVES THE TRADE BALANCE AND IN OTHER WAY ROUND THE STRONG DOLLAR REDUCES THE PURCHASING POWER OF FOREIGN BUYERS.

DEMOGRAPHIC AND AGING AND STOCK PRICE

THE DEMOGRAPHIC AND AGING OF THE INVESTOR TOO IMPACT THE MARKET. AS THE OLD PEOPLE ARE NOT WILLING TO TAKE HIGH RISK WHICH REDUCES THE STOCK PRICE TO ATTRACT THE MAXIMUM AMOUNT OF INVESTMENT.

IF THE POPULATION IS YOUNG, THEY TAKE RISK AND STOCK PRICE RISE.