Assume that in January of 2015 the Congressional Budget Office (CBO) released a

Question

Assume that in January of 2015 the Congressional Budget Office (CBO) released a report predicting that our economy would grow by 1 95% during the 2016 calendar year Assume that one year later (during January of 2016) the CBO releases an updated version of that same report that predicts our economy would grow by 1 57% during the 2016 calendar year Should stock prices move up down or stay flat upon the release of the revised 1 figures in January 2016? Explain your answer m detail Assume that this revision is a surprise to the investor community If, instead most investors had already revised their estimates prior to the updated CBO report, what would the response be to release of the 2016 CBO report? How would stock prices differ a week after the release of the revised CBO report, between the two hypothetical scenarios (surprised vs informed investors)? Explain why

Explanation / Answer

a) The revised estimate is lower than the estimated predicted earlier. Also, it is said that this comes as a surprise to the investor community. On hearing the news, investors will sell their investments in the economy and move them to a better economy where there are better growth prospects. There will be more selling in the market than buying. On account of the market forces (demand and supply), the stock prices in general will move down. b) Given that most investors had already revised their estimates prior to the report. This means there was no element of surprise for the investors and the investors might have already taken the corrective action prior to the report. This report, therefore, will not have much effect on the stock prices and they will stay considerably flat. c) With the element of surprise, the investors tend to react immediately and take corrective actions. The demand and supply forces of the market will help to stabilize the stock prices in a week's time. Therefore, price of scenario a and b will be same in a week's time

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