In bad times, it seems that the stocks in the first economy would fall together, based on the assumptions made in the question. When the economy is experiencing an upturn, stock prices will rise as investors increase their activity due to greater confidence levels. They see the potential in the economy and aim to gain from any increases in stock prices. As investment rises, so does aggregate demand (as investment is an important component of aggregate demand) so in a way it is the investment itself that leads to the economic upturn - although there are other factors at play as well. In an economic downturn, investors will buy out of stocks causing their prices to fall. This leads to the market suffering as investment decreases.
- Which economy is most attractive to investors?
- What about the real world economy?