2007-12-07 04:34:40 · 6 answers · asked by IS 1 in Social Science ➔ Economics
It's very simple. Suppose that you are the owner of a firm, or the stockholder of a corporation. You expect that firm to produce $10,000 each year forever. What is the value of that firm?
Value = $10,000/(1+R) + $10,000/(1+R)^2 + $10,000/(1+R)^3 + ......
When inflation goes up, R goes up. This means that the value of future dollars is less in today's dollars, according to the stock price formula above.
Result: stock prices fall when inflation goes up.
2007-12-11 02:12:36 · answer #1 · answered by Allan 6 · 0⤊ 0⤋
Stock market show instantaneously the value of each paper because each new information or data (inflation) affect the value of it; differences between real value of paper and market value of paper means an opportunity for trader to reach some benefits. Additionally the traders must manage the risks and expectations. Stock market reflect the expectations presents in economy. A data about inflation create one expectation more about the response of other variables; then stock market is not sensitive only to inflation data, else employment data, profits data, interest rates data...
2007-12-07 05:40:31 · answer #2 · answered by CSI - Economics 4 · 0⤊ 0⤋
Obviously you have never invested big money in the stock market or you would know the answer to this.
2007-12-07 05:03:14 · answer #3 · answered by Anonymous · 0⤊ 1⤋
If inflation is too high, meaning higher then the wage increases, people have less to spend and this slows down the economy.
2007-12-07 04:38:51 · answer #4 · answered by Neil 7 · 0⤊ 1⤋
People with lots of money influence the market and the recent deflation of US dollars is causing an uproar
2007-12-07 04:44:10 · answer #5 · answered by DP 2 · 0⤊ 1⤋
Why are fish so sensitive about being in water?
2007-12-07 04:38:13 · answer #6 · answered by Anonymous · 0⤊ 1⤋