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Sept 2011 paper 2 q5 (iv)

R

r_v.s

Member
In the short term, there would be low inflation and lower interest rates. Salaries would be lower. Companies incur lower costs.
So equities would do well.

But lower interest rates would lead to higher consumption and investment spending...So would equities not rise further?
Then increased spending leads to inflation, then again purchasing power would reduce and equities would fall...but would that be in the short term?

Would you please explain where I'm going wrong?
 
The Examiners' Report is focusing on the issue of lower salaries, ie these lower salaries also leads to a reduced demand for goods. The impact of this will depend on the type of company:
- companies that aren't exposed to domestic demand would see a fall in costs as wages fall but not a fall in demand
- BUT companies that rely on domestic spending and perhaps can't reduce their pay as much as others are likely to be adversely affected and suffer a fall in share price.
 
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