Question

Suppose that increases in the money supply lead to a rise in stock prices. Does this mean that when you see the money supply has sharply increased in the past week, you should go out and buy stocks? Why or why not?

Answer 1

Answer:

Yes

Explanation:

Money supply's increase usually happens alongside changes in stock prices or prices change before the change of available money level in the economy. However, if changes in the money supply would be reliable parameter of future stock price changes up, than rationale investor would go out and buy stocks. However, usually all the information about the prices of the stock are already part of that stock's price and it is difficult to estimate its future fluctuations.