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Chapter 17: Q10. (page 369)

If the Fed increases interest rates, the SML will shift _______ and asset prices will _______.

  1. down; rise

  2. down; fall

  3. up; rise

  4. up; fall

Short Answer

Expert verified

The correct option is (d): up; fall

Step by step solution

01

Step 1. Explanation

SML vertical intercept shifts upward with the increase in the rate of interest by the Fed. The rate of return on a risky asset will increase, leading to a decrease in price as the price is inversely related to its return. Thus, the asset price will fall. Hence, the SML will shift up, and asset prices will fall.

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