Question

On October 15, 2019, the Department of Labor announced that the Producer Price Index (PPI) experienced an unexpected 1.1 percent increase in September, the largest jump in 9 years. Based on this information alone, what would you expect to happen to interest rates and stock prices?
A. We should expect higher interest rates and lower stock prices
B. We should expect higher interest rates and higher stock prices
C. We should expect lower interest rates and lower stock prices.
D. We should expect lower interest rates and higher stock prices.

Answer 1

Answer:

A. We should expect higher interest rates and lower stock prices.

Explanation:

Producer price index refers to the price that producers recieve for their products. When there is an increase in PPI it means producers are receiving more revenue.

Increased revenue will result in more money in circulation. To regulate the excess money the monetary authorities will increase interest rate to reduce borrowing and by extension money in the economy.

Because there is now a need to get more funds by the companies, they will lower share prices to make them attractive to prospective investors.