Higher economic growth: (Select the best answer below.)
A. increases the volatility of stock prices.
B. decreases stock prices.
C. increases stock prices.
D. does not affect stock prices.
The correct answer and explanation is:
The correct answer is C. increases stock prices.
Economic growth is generally viewed positively by investors because it reflects an expanding economy with higher productivity, increased consumer spending, and growing business profits. When the economy is growing, businesses are likely to experience higher revenues and profits, which tend to result in higher stock prices. This is because investors expect companies to generate more profits, and as a result, they are willing to pay more for shares in those companies.
Economic growth often leads to an increase in employment, rising wages, and consumer confidence, all of which boost demand for goods and services. This, in turn, can drive corporate profits higher. Furthermore, when economic growth is strong, interest rates are typically low, which makes borrowing cheaper for businesses and consumers. This stimulates investment and spending, further boosting stock prices.
Additionally, growth in the economy can make stocks more attractive relative to other forms of investment, such as bonds or savings accounts, which may offer lower returns in a growing economy. As a result, more investors may choose to allocate their money into stocks, driving up demand and stock prices.
However, it is important to note that the relationship between economic growth and stock prices is not always straightforward. Other factors, such as inflation, geopolitical events, and market sentiment, can also impact stock prices. For instance, if economic growth leads to inflationary pressures, central banks might raise interest rates, which could negatively affect stock prices. But in general, sustained economic growth tends to have a positive impact on stock prices.