Question

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

Short answer

It is not advised to purchase stocks if stock prices rise owing to an increase in the market's money supply.

Step-by-step solution

Stock market :

A market where businesses may register and sell long-term debt and securities to the general public.

Explanation :

It is not advised to purchase stocks if stock prices rise owing to an increase in the market's money supply. Many firms' stock prices grow when the money supply expands, but this reason should not be used as a basis for buying the shares, even if the company's previous stock price was low. This is because stock values rise in response to news releases, especially if the news is fresh and unexpected. This news is not always genuine, and if a person buys stocks and the announcement turns out to be untrue, he may lose money.